- Ford (F) stock has corrected significantly from highs and current levels are attractive for fresh accumulation.
- Portfolio transformation towards electric vehicles is likely to yield results in the next few years. Hydrogen fuel cars might be in the pipeline in the long-term.
- Strong financial capabilities to make big investments in car production and an increase in battery capacity.
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Around the same time last year, Ford (NYSE:F) was trading at $12.2. With forward valuations being depressed coupled with positive business developments, F stock doubled by January 2022. However, a correction ensued and F stock currently trades lower by 36% from 52-week highs of $25.9.
I believe that the correction is over for the stock. After some consolidation below $20 levels, F stock is likely to break-out on the upside. This column will discuss the factors that are likely to be the catalysts for the rally.
First and foremost, F stock trades at a forward price-to-earnings-ratio of 8.4. Valuations seem attractive considering the growth potential. In particular, with Ford working on a significant portfolio transformation towards electric vehicles.
I wanted to talk about the valuation at the onset because the automobile industry is not free from headwinds. It seems likely that the Russia-Ukraine conflict will have an impact on automobile production. Higher inflation and price possible price escalation might have an impact on automobile sales.
Having said that, F stock seems to have discounted the concerns. Additionally, higher energy price coupled with Europe’s dependence on Russia for energy is likely to accelerate adoption of EVs. This is benefit automakers beyond the near-term concerns. I would therefore look at the correction as an accumulation opportunity.
Big Opportunity in Electric Vehicles
Recently, Ford filed a patent for hydrogen-fueled combustion engine with the U.S. Patents and Trademark office. In the coming years, hydrogen fuel driven cars might be another growth segment for Ford.
Since the focus is on Europe, let’s talk about Ford’s ambitious plans for the region. Ford believes that by 2026, the company’s vehicles in Europe will be zero-emissions capable, all-electric or plug-in hybrid. Further, by 2030, the company is likely to be all-electric in Europe.
Ford has already undertaken a $1 billion transformation of its Cologne manufacturing unit. There are two partnerships that will help the company achieve its ambitious plans.
First, Ford has an agreement with Volkswagen (OTCMKTS:VWAGY) for a collaboration on the MEB electric platform. Recently, both the partners expanded the collaboration with a target to produce 1.2 million units of EV on the MEB platform over a period of six-years. The partnership will further be expanded to commercial vehicles and autonomous driving.
Further, Ford has signed a non-binding memorandum of understanding with SK On Co and Ko Holding. The partnership will build one of Europe’s largest commercial vehicle battery production sites in Turkey. Ford already has a leadership position in Europe for commercial vehicles. The new battery production site will support the commercial vehicle portfolio transformation to all-electric.
Of course, Ford will be investing $22 billion in the next few years in the EV sector. Therefore, the growth plan is not limited to Europe. The company has already started delivering the electric version of Mustang Mach-E to customers in China. Ford plans 25 direct-to-customer battery electric vehicle stores in the next few years.
Overall, the company has guided for two million annual EV production by 2026. The EV segment is likely to be a key growth driver in the next few years.
Bottom Line
As of Q4 2021, Ford reported a liquidity buffer of $52.4 billion. This includes the value of the company’s stake in Rivian Automotive (NASDAQ:RIVN). Further, with positive adjusted free cash flows, it’s likely that the liquidity buffer will increase. For the current year, the company has guided for adjusted FCF of $6 billion (mid-range). Therefore, Ford is well positioned to make big investments in the electric vehicle segment.
I mentioned about the inflationary risk in 2022. Ford has guided for EBIT growth of 15% to 25% for the year. This is after incorporating the inflationary pressure. Overall Ford has an impressive BEV line-up that includes Mustang Mach-E, E-Transit and F-150 Lightning. These vehicles are likely to boost growth in North America, Europe and China.
F stock therefore looks attractive from a medium to long-term perspective. The EV developments are likely to serve as positive catalysts in the next few years.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.