Why Ford Stock Stomped on the Gas Friday

What happened

On a bright, promising day for the stock market, with the Dow up 1.5% and the S&P 500 closing 2.4% higher, Ford Motor Company (F 8.52%) stock raced higher than most, advancing an amazing 8.5% through the closing bell.

You can thank Morgan Stanley for that.

Classic Ford Mustang races down an open road.

Image source: Getty Images.

So what

Investors were ebullient in general today, and no doubt that optimism — after more than a week of nearly nonstop selling — helped to jump-start Ford stock moving higher. But Friday also featured some good news that belonged entirely to Ford.  

For the first time in 18 months, observed investment bank Morgan Stanley, Ford stock fell below its targeted share price of $13 “thanks” to the stock market’s May sell-off. At long last, the banker had an excuse to remove its “underweight” (i.e., sell) rating on Ford shares and replace it with an “equal weight” (i.e., hold) rating, according to a note on today.  

Now what

Of course, Ford stock ended the day at $13.50 per share on Friday. So does this mean it’s already too late to buy this automaker? Is Ford stock now overpriced? Maybe, but also maybe not.

This is more than just a simple “target price”; Morgan Stanley actually values Ford stock along a range of possibilities, from as little as $5 a share in the event the automotive market continues to deteriorate, to as high as $25 a share if electric cars don’t replace internal combustion engines on trucks and SUVs quite as quickly as most investors seem to be betting on, and if Ford also manages to earn a profit from its new EV ventures. So even though Ford gained 8.5% today, there may be as much as 85% upside still to go!

And you know what? I actually agree with Morgan Stanley on this one. Indeed, I suspect the analyst is being conservative.

Priced at just 4.7 times earnings currently but paying its investors a generous 3% dividend yield, Ford stock doesn’t have to grow earnings much at all to justify its current stock price. (That’s lucky for Ford investors because adjusted earnings are actually only predicted to grow about 5% annually over the next four years, according to data from S&P Global Market Intelligence.) The really good news for Ford investors, though, is that while generally accepted accounting principles (GAAP) profits only just putt-putt along, Ford is expected to more than double its free cash flow over that same time period to the point where it’s churning out $12.7 billion in annual cash profit by 2026.

That’s nearly 25% of what all of Ford is worth today, and Ford could be minting that much money in less than four years from now. Investors betting on Ford’s future today, I suspect, are making a very smart bet.

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