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S&P Capital IQ


05/23/16 10:00:10 AM



This week's Focus Stock of the Week is Ford Motor Inc. (F: $13) which carries S&P Global Market Intelligence's highest investment recommendation of 5-Stars, or Strong Buy. Dearborn, MI-based F is the second largest U.S.-based producer of cars and trucks. We expect that the company will generate about $145 billion in revenues in 2016 and $147 billion in 2017. Our recommendation is based on our expectations that Ford will benefit from rising global vehicle demand, led by growth in the China and improvement in Europe, while maintaining a supportive balance sheet, and that F stock has attractive total return potential.

The company, under its CEO, Mark Fields, is largely following in the path of his successful predecessor, Alan Mulally, who positively changed Ford's company culture. Mr. Fields is continuing its expansion in the very important China market as it adds product, dealerships. Ford has been gaining market share in the growing China market. The company is adding capacity in that region in order to keep up with rising demand for its vehicles. In addition, the company is investing in alternate propulsion vehicles, as well as autonomous driving vehicles, as it seeks to add to its mobility and environmental sustainability offerings.

S&P Global Equity Research forecasts that U.S. new light vehicle sales volume will rise 1.0% to a cyclical peak and industry record of 17.6 million units in 2016, before easing slightly in 2017. Meanwhile, J.D. Power (owned by S&P Global Inc.), projects global new light vehicle sales volume will increase 3.0% in 2016 to 91.9 million units, and 2.0% in 2017, led by China growth.

We estimate 3.0% higher overall Ford revenues for 2016, boosted by increased global industry demand, a better U.S. mix and a full-year's sales of certain new products in the U.S., including the new Ford-150 pickup truck, which should be largely offset by the stronger dollar and regional weakness. The financial services segment historically has been an important sales and earnings contributor, and in 2016 this segment's profit is likely to equal or exceed 2015 levels.

We see profit expanding in 2016, as Ford benefits from new products and a favorable mix, and improved international margins outside South America, partly offset by competitive pressures and wider losses in South America. Extra production volume and more efficient capacity utilization for the aluminum F-150 pickup trucks should enhance income and has already contributed to record quarterly net income in North America in the 2016 first quarter. Cost-cutting should benefit Ford across regions. Europe profitability should improve even with challenges in Russia. Automotive cash flow should decline in 2016, largely due to two specific non-recurring items

Our EPS estimate for 2016 is $2.12, up from 2015's reported $1.84. We see EPS growth to $2.20 in 2016.

We view positively Ford's increased annual capital spending plans of $7.5 billion, up from $6 billion, as this reflects improved sales prospects. Gains should come from both international and U.S. volumes. We have favorable expectations regarding dividend growth and share repurchases.

We consider the balance sheet to be sufficiently strong to maintain its dividend while supporting product investment throughout the business cycle. In addition to the $0.60 annual dividend payment, we expect special dividends during favorable parts of the business cycle to add to shareholders returns. We expect the quarterly dividends payments to be maintained even during softer sales volume periods. At March 31, the company had automotive cash and marketable securities of $24.3 billion, compared to debt of $13.0 billion.

Our 12-month target price is $18, based on historical and peer P/E analysis. We apply a multiple of 8.5X our 2016 EPS estimate of $2.12 to arrive at our target, a premium to its closest domestic peer. With our target price of $18, and a recent 4.5% dividend yield, we see approximately $5 upside for the stock and about 40% total return potential.

Risks to our recommendation and target price include higher gasoline prices, weaker than-expected demand for Ford vehicles, and higher raw material costs. Competitive pressures in Europe and elsewhere could intensify. New products and increased competition, including from lower-cost competitors, could hurt profits. Performance in China could deteriorate where demand could slow and pricing could be pressured.

S&P Global Market Intelligence's views on stocks are constantly re-evaluated. Please refer to our most recent publication on this stock to see our current view.


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