Ford's Rare Two-Notch Upgrade Signals Huge Long-Term Potential Upside

Jon C. Ogg

Ford Motor Co. (NYSE: F) has become a company that almost seems incapable of doing anything correct. With sales disappointments having persisted, its stock chart had signaled lower lows followed by lower highs. But that may have been close to changing at the start of 2018 after its shares hit $13, before getting caught up in the market sell-off.

Analysts almost hate to defend Ford these days. One standout is Morgan Stanley, which raised the stock to Overweight from Underweight, while raising its price target to $15 from $10.

What matters here is that this is not only a two-notch upgrade. This call removes the equivalent of a Sell rating, and the 50% jump in the price target implies an upside of almost 40%, before even taking Ford’s 5.5% dividend yield into consideration.

Driving this big upgrade were Ford’s low valuation, restructuring expectations and a strategic deployment that may halt years of the company underperforming. On the valuation side of the equation, Morgan Staley thinks that the Ford F-150 value could be more than Ford’s enterprise value. The firm also believes that sales estimates and expectations may have bottomed out.

Morgan Stanley raised Ford’s 2018 earnings estimate to $1.44 per share from $1.40. The 2019 estimate was raised to $1.26 per share (from $1.06) and the 202 estimate was raised to $1.33 (from $1.07).

Morgan Stanley’s Adam Jones had rated Ford with an Underweight rating for more than three years.

Two-notch upgrades are not normal, and it’s rare for an analyst who has been deemed a perma-bear to jump to such a positive stance. And as for the 45% total return opportunity presented in this call, most traditional Dow Jones industrials and S&P 500 analyst upgrades had implied upside for an underlying stock in a range of 8% to 10% in late 2017 and as much as 15% as earnings season was kicking into such strong reports and into February’s sell-off.

If Morgan Stanley is right, Ford is valued at less than eight times expected earnings. That may sound dirt cheap, but that is normal for carmakers, and Ford is expected to have spotty earnings.

Susquehanna may be far less aggressive in Ford, but on Wednesday it also lifted its price target to $12 from $11. A day earlier, Nomura lowered its price target on Ford to $10 from $11. Both firms carry Neutral ratings.

Unfortunately, this upgrade on Wednesday came on the same day that Ford announced it was recalling some 1.3 million vehicles due to loose steering wheel bolts. Still, its shares rose.

Ford shares were last seen up 3% at $11.11. Its 52-week trading range is $10.14 to $13.48, and its consensus analyst target price was $12.16 ahead of the call and i$12.39 afterward.