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Overview: Ford Motor Company (NYSE: F) is a global automotive and mobility company. The Company’s business includes designing, manufacturing, marketing, and servicing a full line of Ford cars, trucks, and sport utility vehicles (SUVs), as well as Lincoln luxury vehicles. The Company operates in four segments: Automotive, Financial Services, Ford Smart Mobility LLC, and Central Treasury Operations. The Automotive segment primarily includes the sale of Ford and Lincoln brand vehicles, service parts, and accessories across the world. The Financial Services segment primarily includes its vehicle-related financing and leasing activities at Ford Motor Credit Company LLC. Ford Smart Mobility LLC is a subsidiary that designs, builds, grows, and invests in emerging mobility services. The Central Treasury Operations segment is engaged in decision making for investments, risk management activities, and providing financing for the Automotive segment.
Automotive Market: The global auto market will likely undergo dramatic change over the next 10-15 years. Autonomous driving could forge a new era for the modern transportation industry in many ways. In order to fully explain our thesis on Ford, we need to make a few assumptions about the industry:
a) People will migrate towards major metropolitan regions over the upcoming 30-50 years, leading to a concentration of passengers in cities. This trend has been documented in several cases, including by former US Secretary of Transportation Anthony Foxx.
b) Ride-sharing costs will decrease due to autonomous driving, as roughly 80% of the cost of an Uber ride is driver-related. Eliminating this cost, along with improvements in safety leading to lower insurance costs, should significantly reduce shared vehicle fees.
c) With ride-sharing costs lower, and assuming real automobile costs stay fairly constant, fewer individuals will need to own a car in the near to medium-term future.
Given these assumptions, we can expect auto sales to fall over time. Additionally, there is a high amount of uncertainty in the industry around:
a) How far each major auto producer has come towards autonomous technology already
b) How quickly sales will decline
c) What effect autonomous vehicles will have on margins
Over the past 2-3 years, many of the auto maker stocks have declined to reflect these forecasts. The focus when looking at an automotive stock then, is to forecast cautiously, see if we can find good value given the recent selloff, and find strong reasons for short-term moves.
Our model for F contains numerous conservative assumptions that we feel are important to highlight. First, we project a strong decline in sales over the next five years. Second, we forecast EBITDA Margins to fall by 200 basis points through 2021. Finally, we give Ford a 10-year CAP going forward, which allows the firm to generate positive economic profits only until 2026 before breaking even (on an economic basis). Given these critical assumptions, we do still find good value in Ford’s equity.
Hurricanes Harvey, Irma and Maria: In the upcoming quarter, there are numerous catalysts for F that stem directly from the recent damage done to Texas, Florida and Puerto Rico:
-Vehicle Destruction: It is estimated that around 1 million vehicles were damaged by hurricanes Harvey and Irma alone, with more afterwards due to Maria. Assuming most owners had insurance, completely flooded vehicles will be replaced once insurance policies are paid. This should cause a short-term boost to Ford top line revenues. The firm recently released September 2017 orders, which grew significantly, rising 8.7% over the same month in 2016, already reflecting some benefits from post hurricane purchases.
-Texas Stereotypes: For domestic sales, Ford should receive bullish sentiment from the investor community due to the general belief that there is a disproportionately high amount of Ford vehicles in Texas. Investors could begin to speculate that the damage done by Harvey could lead to Ford having higher new sales than other manufacturers due to the hurricane.
-Future Fears of Used Vehicles: An upcoming indirect impact that the hurricanes will have is that the used car market will contain partially damaged vehicles over the next 1-3 years. It’s possible that there will be a higher amount of Lemon cars in the market and that consumers will prefer New to Used for a short cycle. This could help propel many auto makers, who will be able to sell new vehicles at closer to full price.
Overall, we believe that Ford stock presents a good value opportunity in the short-term this quarter. The decline in price over the past few years has led the equity to a much more attractive valuation, and the recent hurricanes should bolster top line growth and positive sentiment in the upcoming months. Our model shows a target price of $14.95, representing roughly 20% upside from the October 5th close.