- EPS expected to fall 19% in 2014, on flat revenue growth.
- The stock is a buy down to the $13.50 - $14 level;
- Intrinsic value is $22 - $25 per share.
Ford Motor (NYSE:F) reported a big earnings disappointment for q1 '14 in late April, '14, when the auto giant reported $0.25 in actual EPS versus the $0.39 expected on $33.9 billion in revenue on the $34 billion expected.
The stock hasn't reacted much since the earnings report because the majority of the price damage occurred in mid to late December '13, after Ford management guided 2014 pre-tax income, to $7 - $8 billion versus the $9 - $10 billion expected thanks to launch of a plethora of new vehicles in 2014.
Here was our q1 '14 earnings preview. We still consider F to be 30% - 35% undervalued with an intrinsic value in the mid $20's, versus the $15.75 trading value today.
To keep this review quick and easy, here is the trend in EPS and revenue growth, per the Thomson Reuters consensus estimates, as of the last three quarterly earnings reports:
EPS consensus estimate trend, y/y growth:
|3/14 q1||12/13 q4||9/30 q3|
2016 - est
|2015 - est||62%||41%||26%|
|2014 - est||-19%||-17%||11%|
|2013 - actual||15%||15%||18%|
* Source: Thomson Reuters data and internal s/sheet
Revenue consensus estimate trend, y/y growth
|3/14 q1||12/13 q4||9/30 q3|
|2016 - est||4%||4%||-2%|
|2015 - est||6%||7%||6%|
|2014 - est||0%||0%||5%|
|2013 - actual||10%||10%||10%|
* Source: Thomson Reuters data and internal spreadsheet
Readers can quickly see how before the q4 '13 quarter was reported in January, '14, the EPS and revenue growth for 2014 was revised down sharply, and more so for EPS than revenues.
This is an investment year for Ford.
What makes the valuation case even more compelling is that with even modest improvement in Europe, which cost Ford between $0.40 and $0.45 per share in 2013 in terms of the pre-tax income loss, EPS growth could be improved markedly, and Europe is getting better.
Ford guided to a $2 bl European loss in early 2013, with the actual loss of $1.6 billion, which tells me the initial estimate of their launch costs will likely be worse than actual too.
Again, to keep the redux short and sweet, our internal intrinsic value model raised its intrinsic value estimate for Ford to $20 versus $17 from q4 '13, although admittedly our model is more volatile than most, and tends to put a greater emphasis on earnings growth.
Morningstar's discounted cash-flow model, estimates Ford's intrinsic value at $25 per share. Morningstar's model has been pretty consistent at valuing Ford between $25 - $26 the last three quarters.
Using the current $1.91 estimate for 2016, the market needs only apply a 13(x) multiple to that dollar estimate to reach the $25 fair value estimate.
On a cash-flow basis, Ford is trading at 5(x) consolidated cash-flow and 7(x) auto cash-flow, which is not unusual.
The current 3 year consensus for Ford's EPS and revenue consensus is for 4% revenue growth and 15% EPS growth, and that is with Venezuela, the winter weather, and the shock of the 2014 launch costs in the current consensus.
We think F remains substantially undervalued, but that is just an opinion.
The 200-week moving average is roughly around the $13.50 level, where we would be prepared to add more F to client's current positions.
The 2014 low tick is $14.40.
Some good technicians we follow think the stock looks tired and could correct 5% - 10%, so if it does, we are ready.
If you can be patient, with an 18 to 21 month time horizon, I think Ford shareholders could be handsomely rewarded from the current levels, and if we get a pullback in the shares.