Ford Motor Company (NYSE:F) just reported rapid sales growth for August, with total sales up 48% vs. August 2021. While electric vehicles (“EVs”) made up only 3.7% of the total number of vehicles sold, the company reported a growth rate of 310% vs. August last year, largely due to the popularity of the F-150 Lightning. Ford’s new Bronco has also been selling fast.
Ford’s March announcement that it would split into two separate divisions, with one focused on EVs and the other on traditional internal combustion vehicles, has received widespread support. EV companies trade at much higher valuations than traditional car companies (Tesla’s (TSLA) forward P/E is 63 vs. F’s 7.3), and breaking up Ford’s EV business will highlight developments and innovations that can help Ford lead in this area.
12 months price history and basic statistics for Ford stock.
With low interest rates and Ford’s impressive new vehicle releases, the F enjoyed a significant rally from early September 2021 to mid-January 2022. Ford’s announcement in October that it was returning dividends also contributed to investor enthusiasm. During the (approximately) 4-month period from September 1, 2022 to January 12, 2022, F rose from $13 to $25, up 92%. With concerns about a slowing economy, along with rising interest rates, investors are retreating. The company’s significant revenue loss for Q4 2021, which was reported on February 2, accelerated the sell-off. Stocks have returned a total of -25.3% for YTD vs -27.7% for the auto industry as a whole (as tracked by Morningstar) and -16.9% for the S&P 500 (SPY).
Historical (4 years) and future quarterly EPS forecasts for F grades. Green (red) is the amount by which EPS beats (missed) the expected consensus value (Source: ETrade)
Q2 earnings, reported on July 27, were strong, with EPS beating expectations by more than 50% (expected quarterly EPS was $0.45 vs actual EPS at $0.68). While the consensus view suggests that Q2 is an anomaly and the next year or two will have significantly lower earnings, it wouldn’t be surprising to see one or more substantial positive surprises due to the rapid sales of the F-150 Lightning and Bronco.
I last wrote about Ford almost 6 months ago, on March 15, 2022, and I maintain a neutral/hold rating on the stock. At the time, the stock was trading at $15.73 and has since fallen 5.4% to hit its current level of $14.88. At the time, Wall Street’s analyst consensus rating was neutral and the consensus 12-month price target was about 40% above the stock’s then-current price. However, there is substantial disagreement between individual analysts, with the highest target price at more than 2.5X the lowest. High dispersion among analyst price targets reduces the consensus predictive value. The outlook expressed by call and put option prices on Ford, the market’s implied outlook, is bearish. I compromised between the bullish analyst consensus and the implied prospect of a bear market by keeping the rating on hold.
For readers unfamiliar with the implied view of the market, a brief explanation is required. The price of an option on a stock is largely determined by the market consensus estimate of the probability that the stock price will rise above (call option) or fall below (put option) a certain level (call option price) between now and when. option expires. By analyzing the prices of call and put options over a range of strike prices, all with the same expiration date, it is possible to calculate a probabilistic price estimate that reconciles the option price. This is an implied view of the market. For deeper explanation and background, I recommend this monograph published by the CFA Institute.
I’ve calculated the updated implied-market outlook for F and I’ve compared it to the current Wall Street consensus outlook in reviewing my rating.
Wall Street Consensus Outlook for F
ETrade calculates Wall Street’s consensus outlook for F by combining the views of 15 rating analysts who have published ratings and price targets over the past 3 months. The consensus rating is neutral/hold and the 12-month consensus price target is $15.56, 3.5% above the current share price. The consensus price target has fallen drastically from its May value, $23.13. As in May, the spreads between individual price targets are large, with the highest being 2.3X the lowest. As a rule of thumb, I mostly ignore Wall Street’s consensus price targets when this ratio exceeds 2 because forward consensus value decreases with increasing dispersion in individual analyst price targets.
Wall Street analyst consensus rating and 12-month price target for F (Source: ETrade)
Look for the Alpha version of the Wall Street consensus view built using price targets and ratings from 23 analysts who have published their views over the last 90 days. The consensus rating is bullish and the 12-month consensus price target is $17.20, 14.4% above the current share price.
Wall Street analyst consensus rating and 12-month price target for F (Source: Seeking Alpha)
It is quite unusual to find large discrepancies between Wall Street’s consensus calculations. ETrade has a consensus rating on hold, with a total expected 12-month return (including dividends) of 6.5%. Seeking Alpha has a consensus rating on purchases, with an expected 12-month return of 17.4%. This disagreement, due to the special selection of the analysts surveyed, highlights the lack of agreement.
Market Implicit Outlook for F
I have calculated the implied-market outlook for F for a period of 4.4 months from now to January 20, 2023 and for a period of 9.3 months from now to June 16, 2023, using put and call option prices expiring on each of the two this date. I chose this specific date to provide an insight into early and mid-2023, and because these options tend to be among the most liquid.
The standard representation of the implied view of the market is the probability distribution of price returns, with probabilities on the vertical axis and returns on the horizontal.
Probability of market implied price return for F for a period of 4.4 months from now to January 20, 2023 (Source: Author’s calculations using option quotes from ETrade).
The implied-market outlook is generally symmetrical, although the probability peaks shift slightly in favor of negative returns. The maximum probability corresponds to a price return of -5% for this 4.4 month period. The expected volatility calculated from the distribution is 48% (annual).
To make it easier to compare the relative probabilities of positive and negative returns, I rotated the negative return side of the distribution about the vertical axis (see graph below).
Probability of market implied price return for F for the period of 4.4 months from now to January 20, 2023. The negative return side of the distribution has been rotated around the vertical axis (Source: Author’s calculations using option quotes from ETrade).
This view suggests that the probability of a negative return is higher than the probability of a positive return of the same magnitude, across the most likely outcomes (the red dotted line is consistently above the solid blue line on the left of the graph above). This is a bearish slope in the implied outlook of the market.
The theory suggests that the implied view of the market is expected to have a negative bias because investors are, in the aggregate, risk averse and thus tend to pay more than fair value for downside protection. However, there is no way to measure the magnitude of this bias, or whether it exists. With the expectation of a negative bias, I interpret this market’s implied view as predominantly neutral, with a bearish slope.
The implied market outlook for the 9.3 month period from now to June 16, 2023 is more bearish, with a larger spread in probability favoring a negative return (dashed red line seen above the solid blue line on the left of the chart below). The maximum probability corresponds to a price return of -18% over this 9.3 month period. The expected volatility calculated from this distribution is 47% (annual). Even with the expected negative bias, I interpret this implied market view as bearish.
Probability of market implied price return for F for the 9.3 month period from now to June 16, 2023. The negative return side of the distribution has been rotated around the vertical axis (Source: Author’s calculations using option quotes from ETrade).
The implied-market outlook for F shifts from neutral, with a bearish slope, over the next 4.4 months to bearish over the next 9.3 months. Expected volatility is stable at 47% to 48% through mid-2023.
Ford made an important step to position the company to thrive with growth in the EV market while also maintaining its dominant position as a manufacturer of internal combustion engine (ICE) vehicles. Strong revenue growth, emerging from a period of pent-up demand, together with the positive reception of a number of new models, boosted earnings.
Looking ahead, with higher interest rates and widespread expectations of an economic slowdown, Ford’s growth is expected to slow. Wall Street’s consensus price target for F has declined substantially in recent months. There is enough disagreement on projecting future earnings that Wall Street’s version of the consensus view looks very different because of the specific population of analysts included. ETrade’s version of Wall Street’s consensus rating is on hold, with a consensus price target implying a 6.5% total return. Looking for the Alpha version of Wall Street’s consensus rating is a buy, with a total expected 12-month return of 17.4%.
As a rule of thumb for buy ratings, I want to see an expected return that is at least the expected annual volatility. With an expected volatility of 48%, even the highest of these two Wall Street consensus price targets is well below this threshold. The implied market outlook is neutral with a bearish slope through mid-January 2023 and bearish through mid-2023. I maintain my neutral/hold rating on Ford.