Ford Motor (F) stock underperformed the markets in 2023, and so did rival legacy automaker General Motors (GM), despite its mammoth share buyback. F and GM have underperformed the markets over the long term, as well, and haven’t created much investor wealth this decade.
However, Ford stock did rebound from its 2023 lows amid the broader market rally, and currently trades at just under $12. Will Ford stock go up in 2024? Here are the good, the bad, and the ugly aspects of the legacy automaker, beginning with the bull case.
The Bull Case for Ford Stock
Ford’s Street-high target price is $20, which is 71% above current prices. In my view, the following is the bullish case for F stock.
- Tepid valuations: Ford stock trades at a next-12 months price-to-earnings multiple of just around 8x. While the multiples are higher than where they bottomed last year, they are still reasonable - especially considering the stretched valuations in many other sections of the market.
- The legacy business continues to do well: I believe markets are a little too bearish on the legacy business of automakers. Despite spiraling losses in the still-nascent electric vehicle (EV) business, and the hit from the new UAW contract, Ford forecast adjusted pre-tax earnings of between $10 billion-$10.5 billion and adjusted free cash flows between $5 billion-$5.5 billion for 2023. During the Q3 2023 earnings call, Ford’s CEO Jim Farley stressed that the company is “nowhere near peak profitability” – unlike what many analysts seem to believe.
- Projected interest rate cuts: The Fed’s December dot plot called for a cumulative cut of 75 basis points in interest rates in 2024. If interest rates fall, it should benefit rate-sensitive industries, including autos. While the minutes of the Fed's December meeting showed that members are “uncertain” about the path of rate cuts, they nevertheless appear imminent in 2024.
- Diversified portfolio: While the demand for EVs has lagged behind the growth in supply, Ford has the advantage of a diversified portfolio, which includes both ICEs (internal combustion engines) and hybrids. As EV sales moved to the slow lane, the company has doubled down on hybrids - and that strategy might pay off. Hybrid demand has been quite good, as the product appeals to that set of buyers who are wary of battery electric cars due to reasons ranging from high initial buying price to range anxiety.
- Ford’s EV business might eventually recover: The entire EV industry went through turmoil in 2023, partially because of Tesla’s price war. Automakers are now realigning their EV investments to better match with demand, which will help restore some sanity in an otherwise crowded market. Ford’s EV business – which it forecast to post a pre-tax loss of $4.5 billion in 2023 – should show better results once the industry stabilizes.
The Bear Case for Ford Stock: Here’s What Could Go Wrong
Meanwhile, there is also a bear case for Ford stock, and it faces risks on both the macro and company-specific level. First, while the consensus view now calls for a soft landing for the U.S. economy in 2024, a recession can still not be fully ruled out. If the long-awaited recession indeed materializes, cyclical names like Ford might see selling pressure.
Secondly, while legacy automakers managed to end the UAW strike, it came with a massive price tag, as Ford expects the new contract to add $8.8 billion in costs through April 2028. According to Ford, the incremental cost per vehicle under the new contract will be $900 by 2028, which implies a hit of 60-70 basis points of adjusted EBIT margin.
Also, Ford still needs to prove its mettle in the EV market. Ford bulls were banking on sales of the all-electric model of its best-selling F-150 pickup, but the company is looking to cut the production of the F-150 Lightning by half in 2024. While the ICE version of the F-150 has been America’s best-selling pickup for almost five decades, it has a new competitor in the form of Tesla's (TSLA) Cybertruck, whose deliveries commenced late last year. Incidentally, Ford has yet again adjusted its pricing for F-150, and has lowered prices on some top models while raising them for entry-level models.
Finally, despite CEO Farley’s turnaround strategy, Ford’s transition to a new-age automaker remains a work in progress. Farley has also rued legacy issues and poor execution on more than one occasion. The most recent recall of the F-150 is not helping matters for the company, either.
Should You Buy Ford Stock in 2024?
All of that said, I believe Ford stock’s risk-reward still looks reasonably attractive. If the company can reach the long-term margin forecasts that it has outlined, the legacy automaker’s stock can reward patient investors.
On the date of publication, Mohit Oberoi had a position in: F , GM . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
