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Ford Stock: Rapidly Expanding EV Market Makes The Valuation Attractive – Seeking Alpha

Ford Mustang Mach-E
y_carfan/iStock Editorial via Getty Images
I rate Ford (NYSE:F) as a buy due to their future growth prospects in the electric vehicle market and superior ability compared to competitors to scale up their supply-chain, infrastructure, and production. After a rough 2020 where Ford posted several poor earnings reports throughout the fiscal year, the Detroit automaker rebounded nicely in 2021. The automobile industry is incredibly cyclical and investors have the right to be weary with analysts projecting a weak 1Q22 earnings report for Ford on 4/27/22.
Ford is not an exception to the current supply-chain issues around the globe. These disruptions have driven the share price down year-to-date. However, there is tremendous growth to be had in the EV market, making Ford an attractive investment at its current valuation. Shareholders will benefit if Ford can deliver on the further electrification of their vehicles.
Both of their EV models, the F-150 lighting and Mach-E, are experiencing strong demand. The Mach-E (pictured above) won Consumer Reports’ 2022 electric vehicle of the year award, overtaking the Tesla Model 3’s top spot from the previous two years. If they can efficiently allocate resources in their increased capital spending on EV, Ford could gain healthy market share from major players in the industry such as Tesla (TSLA), Lucid (LCID), and Rivian (RIVN).
Security Information for Ford (My Model via Excel)
Ford boasts a healthy balance sheet that should aid in their evolution from petroleum to electrification. In 4Q22, the company reported $52 Billion in liquid assets, which included a 12% stake in Rivian. Excluding this equity stake, Ford’s cash balance at FYE21 was $25.9 Billion. It is likely that Ford will sell their equity in Rivian in the coming years, which will bolster their liquidity even further. This gives Ford a comfortable amount of cash to pay off both current and non-current debt in the case of an economic downturn.
Ford’s liquidity will also aid the company in future growth initiatives within the EV industry, allowing them to significantly scale up current manufacturing facilities and invest in the construction of new facilities. In FY22, Ford plans to spend $5 billion for research and development of their electric vehicles, which is twice the amount they spent in FY21. Additionally, Ford plans to spend at least $50 Billion by 2026 on EV. Ford has confidence in their balance sheet, illustrated by their significant increases in capital expenditure to meet EV demand.
In 2020, the global electric vehicle market was valued at $163.01 Billion. Market research firms are projecting the EV market to grow to $823.75 Billion by 2030, representing a CAGR of 18.2% from 2021 through 2030. The United States is leading every country in terms of outlook for potential market share of the EV market (See Below). While Tesla accounts for 79% of new electric vehicles registered in the U.S., the market is expanding at a rapid CAGR of 18%. Rapid market expansion means rapidly increased demand. This gives Ford the opportunity to tap into a new market that has substantial unmet demand to drive shareholder value.
Outlook for EV Market Share – 2022-2030 (Deloitte Analysis)
A number of growth drivers are contributing to the rapid EV market expansion. Lawmakers are beginning to enforce strict regulations on carbon emissions and continue to raise awareness about climate change. For example, California will enforce legislation that requires all automobiles to be fully electric by 2035. Lawmaker policies to combat green-house gas emissions will drive future growth of the EV market.
A second growth driver is the expansion of infrastructure for charging stations. One of the pitfalls for EV is the inability for consumers to drive long-distances due to a lack of charging stations across the country. The United States is experiencing higher growth rates in charging stations than China, Japan and Korea (pictured below). Global deployment of EV charging stations are projected to increase by a massive 31% CAGR to more than 66 million units by 2030. Increased availability of these stations will fix the pitfall for long-distance travel and drive further demand for EV.
Charging Station Deployment by Country and Year (IHS Market Research)
A third and final growth driver behind the EV market are high oil prices. Oil prices in the United States have steadily increased due to a high regulatory environment and the conflict in Ukraine. The rising cost of fuel in the United States to $4 per gallon is a tailwind that makes electric vehicles more attractive to consumers. Consumers will begin to see EV as an investment that will generate a significant reduction in living expenses.
Volkswagen’s MEB Platform (Volkwagen Group)
Ford and Volkswagen have a long-standing strategic alliance. The partnership includes a new fully-electric passenger Ford model that will be offered in 2023. This new model will be based on VW’s MEB platform (see above), while Ford provides the rest of the manufacturing, production, marketing, and sale. By utilizing VW’s MEB platform, Ford is provided with significant cost and scale advantages. Volkswagen is expected to sell up to 15 million MEB platforms by 2028 (see below), while Ford is expected to purchase 600,000 of those platforms over the next 5 years.
Volkswagen MEB Volume (Volkswagen Group)
Like a lot of U.S. companies, Ford’s struggles with supply-chain disruptions began with the Covid-19 pandemic. These disruptions were worsened by the invasion of Ukraine and rising cost of raw materials. Investors might also doubt Ford’s ability to execute on its initiatives in EV. One of Ford’s main advantages over other EV makers is their ability to scale up, which has been recently bolstered by their partnership with VW.
Production capacity and battery supply increase initiatives are already underway for Ford. In early 2021, operations in Europe went all-in on the EV market by committing to 100% of their vehicle range in Europe to be zero emissions capable (all electric or plug-in hybrid). Additionally, they committed to being fully-electric by 2030. This commitment was demonstrated by Ford’s $1 Billion investment to modernize their manufacturing center in Cologne, Germany (see below).
Ford’s New Electrification Center in Germany (Ford Investor Presentation 4Q21)
Ford also recently announced a plan to scale up their EV operations in North America. They are investing in the largest and most technologically advanced manufacturing complex in the company’s entire history. The new complex is called BlueOval City and will be constructed on a 6-square-mile site in Tennessee. This complex will be responsible for the production of electric F-Series pickups and advanced batteries. Moreover, a new battery park will be built in Kentucky containing a pair of battery plants that will power a new lineup of Ford and Lincoln electric vehicles.
These investments, among others, should aid in Ford’s ability to scale up and become a force within the EV market. Ford expects annual global production of its electric vehicles to exceed two million by 2026, about one third of its expected total volume, and up from a projected 600,000 in 2023. It also sees electric vehicles increasing to 50% of total volume by 2030, reflecting new products and market share gains.
As of March 2022, the median P/E ratio (see below) in the automobile industry is 9x earnings. Additionally, the historical 3-year average P/E ratio in the industry is 25x (see below). Ford is currently trading at 3x earnings, which is very small given the potential earnings growth from EV market share. Tesla is currently trading at 203x earnings due to high potential for future growth by being the pioneer within the EV market. 3x earnings is not justified for Ford given their strong position to compete and gain substantial market share in the electric vehicle industry.
Average P/E and Historical P/E of U.S. Auto Industry (Simply Wall Street)
There are few companies that have taken the necessary steps for strong future growth in the EV market. Even though competitors have less potential to compete in EV than Ford, they are trading as though they have higher earnings growth potential. Ford is taking the necessary steps to expand their selection of electric vehicles and increase manufacturing capacity, which will aid in the growth of future earnings reports. They are rushing to get products to market to escape the threat of new entrants taking EV market share.
Forecasted Revenue for Ford (My Model via Excel)
Executive management expects 10%-15% revenue growth for Ford in FY22. For my discounted cash flow model, I made assumptions of a 10% CAGR in revenue over the next 4 years (see above). My DCF analysis arrived at an intrinsic value of $20.52 per share (35.61% upside from the current price of $15.13). Regarding the assumptions of costs and expenses, I used 3-year historical averages as a % of sales.
Over the past three years, Ford’s average cost of revenues were 86.39% of sales. Their 3-year average of operating expenses were 13.54% of sales. Non-operating expenses were 1.1% of sales. Capital expenditures were 4.6% of sales. And finally, changes in net working capital were 10% of sales. Regarding terminal value, I used the 10 Yr Treasury Note as the perpetuity growth rate. After placing these assumptions into my DCF model, I arrived at the following cash flows for FY22 through FY25:
Forecasted Cash Flows for Ford (My Model via Excel)
For my discount rate, I calculated Ford’s WACC to be 7.86% using their current market capitalization and current market value of debt (illustrated below). To calculate Ford’s Cost of Equity, I arrived at market risk premium of 5.31% for their cost of equity by taking the difference between an expected market return of 7.75% and risk-free rate of 2.69% (US Treasury 10Y). To calculate the market value of debt, I used the Ford’s interest expense from 2021, total debt (book value) from YE21, and a period of 4 years. Additionally, I added a risk premium of 1.14%, arriving at a discount rate of 9%.
Discount Rate Calculation- Ford (My Model via Excel)
After applying a discount rate of 9% to my forecasted future cash flows for Ford, I arrived at an intrinsic value of $20.52 per share (pictured below). This represents healthy upside of 35.61% from the current share price of $15.13. My price-target falls on the median of Wall Street 12-month price targets, which vary from $13 to $32 per share.
Intrinsic Value and 12-Month Price Targets for Ford (My Model via Excel)
Going forward, a key headwind for Ford is the labor shortage. Ford’s new facilities in Tennessee and Kentucky are going to require them to hire over 11,000 workers, which may be a tall order. If they are going to have any chance at meeting the strong demand for EV, Ford will have to overcome the growing disparity between jobs and employees. Additionally, the labor shortage has given potential employees leverage over employers in terms of compensation. In order to make these jobs at their new facilities attractive, Ford is going to have to offer very competitive compensation. This might prove to be costly for Ford’s already slim profit margins of 14%.
Supply-chain disruptions are highly prevalent due to the current geopolitical discord, high costs of raw materials, and Brent crude over $100 a barrel. Companies throughout the United States are having to deal with a lack of inventory due to rising costs of materials, while others are lacking the manufacturing capacity to meet demand. Ford is not an exception to supply-chain disruption and they are in the process of scaling up to acquire substantial EV market share.
The risk of recession is steadily increasing and may come sooner rather than later. Despite healthy consumer balance sheets among the U.S. population, Goldman Sachs sees the risk of recession in the next year as high as 35%. This is very much a possibility in the near future given the geopolitical turmoil, inflationary environment, high oil prices, and potential corporate tax hikes. Given the healthy state of the American consumer, I don’t believe this recession will be as bad as the dot com bubble or the sub-prime mortgage crisis, that is unless Putin’s senseless war expands beyond the borders of Ukraine.
Closing remarks
Ford offers an opportunity with healthy upside as they continue their penetration of the electric vehicle market. I do not own Ford, but would buy at the current price. Ford’s financials are very healthy, boasting a highly liquid balance sheet that gives investors comfort during the current economic uncertainty and rising risk of recession. As previously stated, the automobile industry is very cyclical and an investment in Ford will take patience as the company rolls out their next generation of EV products. They are taking all the necessary steps to compete in the EV market, which should generate significant future cash flows to reward shareholders via stock buybacks or increased dividends from the current yield of 2.51%. Long Ford.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.