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Unloved US car giant is cheap and could reward a patient investor
Thursday 13 Aug 2020 Author: James Crux

Investors should buy into recovery potential at Ford Motor Co. In the middle of a multi-year restructuring, Ford is blessed with an iconic brand, is pushing forward towards electrification and has the potential to turn itself around.

Car use may well get a boost coming out of the pandemic as people become more reluctant to travel on public transport due to the risks of infection.

The carmaker could also be among the beneficiaries if a Covid-19 vaccine arrives, as this could trigger a rotation away from hyped-up story stocks such as Tesla towards consumer cyclicals and drive a re-rating of Ford, currently trading on single digit price-to-earnings ratios for 2021 and 2022 and at or around one times book value, according to Refinitiv data.

It’s market cap is also less than a tenth of Tesla’s despite selling more than six-and-a-half times as many vehicles in 2019.

ROADBLOCKS TO NAVIGATE

Detroit-based Ford makes, markets and services Ford cars, trucks, sport utility vehicles and Lincoln luxury vehicles and is attempting to pivot towards electric and autonomous vehicles. The $27.3 billion cap also provides financial services through Ford Motor Credit Company.

Admittedly, the coronavirus has delayed the recovery at Ford, which reported an adjusted $1.9 billion loss before interest and tax for the second quarter, expects to lose money this year due to the pandemic and suspended the dividend in March.

You need to be aware of the risks, as vehicle sales will take time to recover to pre-coronavirus levels, Ford needs to invest heavily in electrification and tensions between the US and major car market China are unhelpful.

Nevertheless, forecasts compiled by Refinitiv point to a return to profit at the pre-tax level in 2021 and 2022. Furthermore, we like the fact Ford now focuses on light-truck models in the US, which the analysts at Morningstar believe is the right move given light trucks speak for more than 70% of US industry new light-vehicle sales.

As the pandemic subsides, Ford should benefit from a demand uptick as Americans (and other nationalities) get back to work and travel around in their millions, using vehicles as their own personal form of protective equipment.

FARLEY’S TAKEN THE WHEEL

Another catalyst is that chief operating officer Jim Farley will succeed chief executive Jim Hackett from October. This accelerated management change comes at a pivotal time for Ford as it attempts to execute an $11 billion restructuring plan and launches key new products including the Ford Bronco SUV.

Wall Street number crunchers expect enthusiastic ‘car guy’ Farley, who joined Ford from Toyota in 2007, to bring a greater sense of urgency to the transformation at Ford, which described him as a ‘very key’ executive in saving the company during the last downturn, one that bankrupted General Motors and what was Chrysler at the time.

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