Ford Is Driving To $40, Who's Calling Shotgun?

| About: Ford Motor (F)

A couple of weeks ago, Bret Kenwell did a masterful job outlining a scenario detailing how Ford (NYSE:F) was heading to $40 per share. This is despite the fact that the stock had been up this year by as much as 35%. Kenwell's article caused an uproar to the extent that readers advised that we seek medical attention. We have. And here's the diagnosis - we are right on target.

I understand investors' reasons for the "raised eyebrows." $40 seems ways away, especially for a stock that is currently trading under $20. Plus, when you consider that shares have already gained well over 1600% since Ford reached $1.01 in November 2008, it does seem as if bulls might be pressing their luck. I will grant that.

Look, I do understand the anxiety created when investors look too heavily on the bright side - I get it. I also appreciate the unsettling reality of the recent bankruptcy filing by the city of Detroit. Still, I don't agree with those who now suggest that somehow this situation make shares of Ford expensive. I would respectfully ask, by what metric? This level of caution doesn't seem justified.

Besides, even with the 35% gains on the year, the company has recently announced sales figures suggesting that there is yet value that hasn't been priced in. Last week, the company announced a 44% year-over-year revenue increase for June in China sales. This was Ford's best ever revenue figure for June. In fact, since the start of the year, sales in China have soared close to 50% to well over 400,000 vehicles sold, helped by the company's new and redesigned models.

Not only has Ford's plant expansion plans worked better-than-expected, but Ford's impressive growth has driven past China's entire auto market this year. Essentially, the company is gaining market share in the world's second largest economy. This is a trend that began at this point last year and the stock has responded accordingly. And there are no meaningful signs of slowing down - hence, one of the reasons for our $40 per share target.

The second, and perhaps the primary reason is the fact that the company has resurrected itself and now has a clear vision under Alan Mulally. He's been arguably the best "GPS" with which Ford has ever equipped itself. He's pointed the company in the right direction and Ford has cruised since reaching its low point in 2008.

Now, I'm not going to pretend there aren't obstacles, stop signs and red lights. I also won't disagree that Ford, as with General Motors (NYSE:GM), hasn't benefited immensely from a strong economic recovery. But I remain convinced that the best is yet to come. With the company due to report second-quarter earnings on Wednesday, I want to take this opportunity to expand on our $40 thesis, especially since Ford's numbers are expected to contribute significantly to our long-term model.

The Street will be looking for earnings-per-share (EPS) of 37 cents on revenue of $35.2 billion, which would represent year-over-year growth of 23% and 12%, respectively. My EPS target is slightly above consensus estimates. I'm looking for at least 40 cents to 43 cents per share, which would bring Ford's year-to-date EPS total to at least 84 cents, when factoring the 41 cents earned in the first quarter.

Given the sustained growth in the economy and Ford's continued strength in China, it won't be too difficult for the company to achieve full-year earnings-per-share of $1.68 and possibly $1.71. My bullishness is also based on the assumption that should Ford achieve better-than-expected EPS targets for 2013, the company will have a clear path to increase its dividend at some point in 2014 - preferably near the beginning of the year.

The effect of the higher dividend will impact the valuation - sending the price-to-earnings ratio higher by roughly 5 points. The resulting effect would justify a fair value of at least $26 per share. Now when you factor that the new valuation only places Ford at just 50% below our $40 price target, it would take another recession to prevent the stock from reaching $40 in four more years. My bet is that our target will be reached 2.5 years from the date of this article, if not sooner.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

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