In case you missed it, Ford (F) trades at only 6.1x forward earnings with a price target ($15.75) that is around 50% above its current valuation. My own research suggests an even higher intrinsic value of $16.57 based on (1) 5.7% growth over the next 6 years and (2) 2.5% into perpetuity, (3) consistent operating metrics, and a (4) bearish discount rate of 12%. The market seems to be absurdly factoring in a weighted average capital that is closer to 17%, which is a discount rate that should only be applied to developmental firms.
Ford's also got a great brand and was able to survive the auto collapse without the government help that General Motors (GM) received. Moreover, results have been strong. Both Ford and GM have beaten expectations 4 out of the last 5 quarters for a respective average of 4.5% and 7.2% above consensus. If Ford yields around 6.2% EPS growth and arrives at 2016 EPS of $2.07 and a 12x multiple, the future stock price would be $24.88. Discounting backwards yields a present value / price target of $15.45 - virtually in-line with the Street's.
The sentiment on the Street is bullish. It is rated an 8 out of 10 on MSN Money's StockScouter. 8 out of the 13 brokerage ratings are "strong buys" and none are "sells". As my price target suggests, there is around a 50% margin of safety that Ford can more than double in price. This leading brand is not going to die any time soon and has a beta of 2.4 to recover lost shareholder value.
Rich with cash after government backing, GM is also an attractive value play. It trades at only a respective 6.3x and 4.8x past and forward earnings with a $33.60 price target, which is 55% above the current value. EPS is expected to grow at 12.4% annually over the next five years. If 2016 EPS hits $6.55 and the multiple is just 8x, the stocks' present value is $32.54 - in-line with consensus. If the multiple hits 12x (where it should be at an absolute minimum), the present value would rise to $48.82. GM may leave a bad taste after it was rescued by the government, but the case for appreciation is backed by low multiples, Street optimism, better-than-expected earnings, and an attractive balance sheet.
After issuing my "strong buy" calls on Ford and GM, it is only fitting to contrast it with my view on Japanese automaker Toyota (TM). Toyota's got an excellent brand, but it trades at 9.9x forward earnings - well ahead of GM and Ford's. The premium made sense certainly a few years ago, but the American brands are now on their feet - or their wheels, anyway - and have the fundamentals to recover last value. Just like how the US stock market took off after the Great Depression, Ford and GM are more likely to take off over Toyota. This period of high growth recovery has clearly not been factored into the domestic automakers in light of their significantly lower forward multiples. Toyota's stock is still likely to do well over the next five years as global demand rises, but only Ford and GM can surge from the ground.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.