Morningstar maintains a positive outlook on Ford Motor (NYSE: F) with a target fair value of $19, which currently trades at $11.37, indicating a significant upside potential of 67%. Ford’s strategic focus on EVs and commercial vehicles, coupled with operational cost control, positions it as a resilient player in an evolving industry. Despite challenges, including high-cost headwinds and competitive pressures, Morningstar sees value in Ford’s restructuring efforts, growth in electric and hybrid vehicles, and its strong position in commercial vehicles.

Investors are encouraged to consider Ford’s fair value estimate, but due diligence remains essential before making financial decisions.

Current Price and Target

Last Close Price: $11.37 (as of October 28, 2024) Target Price: $19.00 Upside Potential: Approximately 67%

Ford’s Strategic Shift: Focusing on Light Trucks and EVs

Ford has prioritized its high-performing light trucks and electric vehicles (EVs). By splitting the combustion engine segment (Ford Blue) and the electric vehicle unit (Ford Model e), Ford seeks operational efficiency and specialized focus on EV growth.
Ford Blue Segment: Light trucks continue to drive U.S. sales, with Ford targeting models like the Bronco and F-150.
Ford Model e Segment: Accelerating EV investment to meet 2030’s target of 50% EV sales. Key models include the Mustang Mach-E and the F-150 Lightning, both positioned to attract new customers.

Financial Highlights and Restructuring Efforts

Ford’s recent quarters reflect a steady financial footing, bolstered by restructuring, although impacted by supply chain constraints and high materials costs.
Adjusted EBIT Margin: Rose by 50 basis points year-over-year to 5.5%, though trailing competitors like GM.
Free Cash Flow: $3.2 billion in Q3, supported by a $1.9 billion improvement in working capital.
Cost Savings: Management aims to reduce costs by $2 billion in 2024 through headcount reduction, streamlined vehicle designs, and enhanced manufacturing efficiencies.

Growth Opportunities in Commercial Vehicles

Ford’s Ford Pro segment continues to excel, delivering a 12.4% EBIT margin in 2023 and driving revenue with commercial offerings like the Super Duty and Transit vans. Additionally, Ford Pro’s software and fleet services offer a high-margin revenue stream, supporting Ford’s competitive edge in the U.S. and European commercial markets.

Profit Drivers and Long-Term Outlook

Morningstar projects Ford’s midcycle EBIT margin to be 6.5%-7% by 2026, with an anticipated total revenue growth rate of nearly 5% CAGR from 2024 to 2028. Although Ford targets a 10% EBIT margin by 2026, cost pressures may slow this progress.
Restructuring Costs: Ford expects further restructuring charges of over $1 billion in 2024, primarily in Europe.
Investment in EV Manufacturing: The BlueOval City BEV plant in Tennessee is expected to produce its first EV pickup by 2027, underscoring Ford's commitment to long-term EV growth.

Risks and Challenges

Ford faces several headwinds, which investors should consider:
High Industry Uncertainty: Cyclical demand and macroeconomic factors, including interest rates and raw material prices, pose substantial risks.
Increased Competition in EVs: Rising EV competition from Tesla and foreign automakers creates pricing and market share pressures.
Union Influence and Costly Labor Relations: As union demands increase, particularly with the United Auto Workers (UAW), labor costs could strain Ford’s profitability.

Conclusion and Recommendation

Ford’s current undervaluation presents a potential buy opportunity with an estimated fair value of $19. Investors willing to hold through Ford's multi-year transition towards electrification and cost containment could find value in this stock. However, due diligence is crucial to weigh Ford’s exposure to industry volatility, evolving EV demand, and restructuring risks.
Disclaimer: Investors should conduct independent research and consult with a financial advisor before making any investment decisions.