Bank of America Merrill Lynch (NYSE:BAC) has a $20 twelve month price target on Ford Motor Co. (NYSE:F). That is an over 40% gain from today's level. According to an article penned by Bank of America Merrill Lynch,
"Ford was selected as one of the 10 best stocks for 2013 due to high foreign sales and a large amount of pent-up demand."
Ford Motor Co. has been on a steady upward trajectory for most of the previous 52 weeks. The stock is up 37% over the last year.
Even so, I feel Ford has much more room to run right now. It is well-positioned for growth in the coming months. The stock is in good shape both fundamentally and technically and has significant catalysts for growth going forward. Nevertheless, let's not get carried away just yet. We need to perform some due diligence to make sure this dog can hunt. Please review the following analysis of Ford for an in-depth examination of the stock's upside potential.
In the following sections, we will perform a review of the fundamental and technical state of Ford followed by an analysis of the underlying catalysts for the stock to determine what upside exists. The charts and tables in this article are provided by Finviz.com and CNBC.com.
Fundamental Reasons To Buy
Fundamental Ratios Look Solid
Fundamentally, Ford has several positives. The company has a forward P/E of 8.55. Ford is trading for 20 times free cash flow. EPS next year is expected to rise by approximately 20%. The company pays a dividend with a yield of 2.82% and has a PEG ratio of 0.95, a net profit margin of 4.22% and an ROE of 36%. Revenues and diluted quarterly EPS are up 10% and 14% year over year respectively.
Balance Sheet Much Improved
Ford's balance sheet is much improved with $126 billion in total current assets. The company has reduced long-term debt significantly over the past three years which has improved their credit rating vastly.
Technical Reasons To Buy
The company currently is trading 2% below its 52 week high and has nearly 10% potential upside based on the consensus mean target price of $15.27 for the company. Ford was trading Friday at $14.07, down almost 1% for the day. Ford just broke out above the major long-term resistance line. See chart below.
Technically, Ford is currently in a well-defined uptrend. The stock has been in a solid uptrend since July of 2012. The stock achieved the coveted golden cross where the 50-day sma crosses above the 200-day sma at the beginning of the year.
Growth Catalysts Going Forward
Chinese Market Penetration
Ford China has broken sales records over the past few quarters. The Ford Focus, the best-selling passenger car in China, led strong sales of Ford cars in China.
Ford is well-positioned to take advantage of the explosive growth in China's SUV market. With automakers scrambling to bring more models to the market to take advantage of the solid margins offered by the category. Ford could see one of the biggest benefits from the Chinese SUV market due to already ramping up production. Ford China is the most promising catalyst for the stock going forward.
Europe Being Right Sized
Furthermore, Ford will be rightsizing European operations saving up to $500 million over the next few years. This will be a primary catalyst for improving the bottom line. Europe has been Ford's Achilles heel for the past few years, draining profits like a sieve. If Ford is able to flip European operations to profitability, this will be a huge help to the bottom line. Management stated at the recent annual shareholder meeting that by mid-decade Europe will be profitable.
U.S. Car Market Looks Strong
Double-digit gains in April auto sales for the Big Three (General Motors (NYSE:GM), Ford, Chrysler is another indication that the tables have turned in the automobile industry. The Detroit automakers increased their U.S. market share by 150 basis points to 46.2% in just a year at the expense of Japanese automakers. Detroit put up the best numbers since 2007 in April.
With U.S. and Chinese sales on the rise and European operations returning to profitability, Ford has several catalysts for growth in the coming years.
- The Eurozone sovereign debt debacle could finally implode causing another credit crunch large enough to disrupt the global economy.
- Execution risk: Ford does not meet earnings expectations due to lagging sales or inability to get European operations under control.
- Ford's stock runs out of steam as investors take profits and move on after such a recent large percentage move in the stock.
- The U.S. falls into another recession causing sales to lag.
The Bottom Line
With Mulally sticking around and sales, market share and profits growing in the U.S. and China the future looks bright for Ford. Couple this with Europe becoming profitable and the stock remains a buy at this level.
Furthermore, Ford has been successful with its foray into the energy efficient product market. Ford says it will pass its full-year record for hybrid sales this month as demand for the new C-Max and electric Fusion looks strong. In April, the automaker delivered 35,034 Fusion hybrids compared to the 3,257 Camry and 19,889 Prius hybrids Toyota (NYSE:TM) moved.
Finally, the Fed is currently employing quantitative easing which should underpin the markets providing the so called "Bernanke Put." Based on these assumptions I believe the risk reward for starting a position in Ford is favorable.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in F over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article is for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment.