This 14% Price Target Reduction on Ford Motor Company Is a Real Head-Scratcher

Ford announces its January sales figures and promptly has its price target slashed 14% by one research firm. Find out the reasoning behind the cut and whether or not it holds any water.

Sean Williams
Sean Williams
Feb 5, 2015 at 9:38AM

2015 Ford F-150. Source: Ford.

What: Shares of automaker Ford Motor Company (NYSE:F) advanced marginally on Wednesday despite news that research firm Stifel Nicolaus cut its price target on Ford stock from $22 per share to $19. It did, however, keep its buy rating on Ford unchanged.

So what: Why the price cut? According to Stifel Nicolaus analyst James Albertine, he and his firm view the new F-150, which is made utilizing a lighter-weight but more expensive aluminum body, as ramping up at a steadier pace than previous models. In plainer English, higher rollout costs and potential skepticism about more expensive repair costs could temper original estimates, which had called for F-150 sales to rocket out of the gate.

Per Albertine, the company's price target reflects a P/E of 12.1 and six times enterprise value-to-EBITDA in 2015. Historically, Ford is valued closer to 10 times its P/E.

On the positive side Albertine notes initial F-150 sales look strong in January, that the company has provided reasonable expectations in volatile markets like Russia and throughout South America, and that its differentiable product designs and good execution should lead to market-share gains.

Now what: Now for the $64,000 question... Does this 14% price target reduction make any sense?

Initially, I did have concerns that repair costs could deter buyers from stepping up to the lighter F-150. However, those fears were quickly washed away when Ford delivered its January sales figures earlier this week. Sales increased 15% in January within the U.S. to 178,341 vehicles, while F-Series trucks set the highest sales mark in January since 2004. The F-150 is spending, per Ford, just 12 days on dealer lots, with the higher-end and higher-margin King Ranch trim moving off dealers' lots in 10 days. For added context, in February 2014, when Foolish senior auto analyst John Rosevear interviewed senior analyst Jessica Caldwell, F-150s were sitting on dealer lots for an average of 83 days.

2015 Ford Mustang convertible. Source: Ford.

In addition to strong F-Series sales, Ford's Mustang saw sales more than double to 8,694 from the prior January. Some of this likely had to do with more favorable weather, but it's also been a direct reflection of sleeker convertible offerings, as Rosevear recently pointed out.

Although Ford's rollout costs for the new F-150 in the U.S. and in China for its new lineup of vehicles is high, the long-term rewards for these investments should be improved market share in key regions like China and the United States.

Based on Wall Street's 2017 consensus of $2.16 in EPS, Ford is valued at close to seven times earnings based on Wednesday's close. Taking into account its historic average P/E of 10, its leading status in the truck category in the U.S., and its rapidly growing share of the Chinese market, I see no reason why a $22 price target, or higher, shouldn't be supported.

This price target cut is a real head-scratcher.