Ford at $19.68?

In this week’s Barron’s, Jack Hough says shares of Ford ($F) could climb by 30%. A 30% gain from here would put the stock at $19.68.

There’s more to the bull case than the F-150, but let’s start there. With an aluminum alloy replacing steel in the body, the truck weighs hundreds of pounds less than the model it replaces. Ford says this will bring up to 20% better fuel economy. With U.S. gasoline averaging $2.94 a gallon last week, down 39 cents since the beginning of the year, pump savings is perhaps a waning motivator. But the weight loss also makes for better handling, faster acceleration, and more hauling and towing power.

F-series trucks bring in the bulk of Ford’s automotive profit. General Motors (GM) re-entered the cheaper midsize pickup market with the Chevrolet Colorado and GMC Canyon. That could indirectly benefit Ford, which doesn’t sell a midsize pickup in the U.S. If GM lowers prices too far on its full-size Chevrolet Silverado and GMC Sierra trucks, it could cut into sales of its new midsize line. If GM keeps its prices relatively high, Ford can do the same, regardless of what the Ram unit of Fiat Chrysler Automobiles (FCAU)—a rising but still distant No. 3 in pickup sales—does.

FORD CEO MARK FIELDS, who replaced Alan Mulally, who retired in July, brought a full payload of bad news to Ford’s late-September investor day. Warranty expenses will cost $1 billion this year, with about half connected to a faulty air-bag mechanism. Operations in Europe and South America will lose more money than expected. Add in the cost to retool F-Series production lines for the new truck, and Ford says pretax profit this year will total $6 billion, short of its goal of $7 billion to $8 billion.

Wall Street expects Ford to earn $1.11 a share this year, down 31%, on $137.1 billion in revenue, down 2%. The revenue decline partly reflects Ford’s decision to pull back on low-margin sales to rental fleets. In 2015, revenue is expected to rebound 7% and earnings per share, to climb back to $1.61. The following year, earnings should approach $2 a share; the stock trades at just 7.5 times that figure.

Posted by on November 15th, 2014 at 6:12 pm


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