Ford Stock Gets a Downgrade—Is There Limited Upside?

Ford stock got a jolt today. Evercore ISI downgraded the stock to “underperform” from the earlier rating of “in-line.” At 10:21 AM ET, Ford (F) stock was trading 0.9% lower at $9.22. In 2019, the stock gained 21.6%.

According to Reuters, six analysts covering Ford gave it a “buy” rating, 10 gave it a “hold” rating, and two gave it a “sell” rating after the Evercore ISI downgrade. The average target price of $10.16 points to over 10% potential upside over the price at 10:21 AM ET.

Ford stock commands valuation premium over GM

Evercore ISI listed Ford stock’s valuation premium over General Motors (GM) as the primary reason for the downgrade. Ford and GM are both legacy automakers threatened by the emergence of Tesla and falling sales of vehicles running on fossil fuels.

In the first 11 months of 2019, Ford saw its deliveries fall 3.3% while General Motors saw a 2.1% decline in deliveries. On the other hand, Tesla’s (TSLA) deliveries surged by 47%. Overall, US auto sales fell by 0.8% during the period.

Ford stock is currently trading at a price-to-earnings ratio of 23.1x. Ford’s enterprise-value-to-EBITDA ratio stands over 10x. On the other hand, General Motors is trading at a PE ratio of 6x and an EV-to-EBITDA ratio of 6.35x.

Why are analysts betting on Ford stock?

One reason that Ford stock holds a premium over GM stock lies in Ford’s electric vehicle push. While General Motors has already had its Bolt and Volt EVs running on the roads, Ford’s Mustang-based Mach-E and Ford F-150 electric has caught the attention of the markets.

In November 2019, Credit Suisse analyst Dan Levy referred to the Mustang Mach-E, noting, “Ford’s new [electric vehicle] should provide a more compelling alternative at the Model 3 price range than the other comps, especially given the performance focus.”

He added, “The launch marks the first real milestone in Ford’s increased emphasis in electrification, and more importantly marks an increased effort by the legacy US automakers to be relevant in electrification.”

Is Ford Mach-E a Tesla challenger?

We would love to call the Ford Mustang Mach-E a Tesla challenger. However, we are afraid that it’s not there yet. Ford plans to make only 50,000 Mach-Es in the first 12 months. On the other hand, Tesla (TSLA) could touch the half-million mark in 2020.

While Ford is just starting its EV journey, Tesla seems to be in top gear. Tesla’s Gigafactory 3 in China delivered the first 15 vehicles on December 30, and it plans to start delivering cars to the public starting on January 7.

Tesla noted that Gigafactory 3 is already producing 1,000 Model 3 cars per week. This output could soon ramp up to 3,000 per week. At full capacity, the plant would be able to produce 250,000 cars.

The company has also secured financing to continue building Gigafactory 3. Last month, Oppenheimer analyst Colin Rusch said that “expectations for a relatively smooth (production) ramp of Tesla’s China facility are increasing.”

Tesla is also spreading its wings in Europe. The company recently drafted a contract to purchase land in Germany to build Gigafactory 4. Electrek quoted Tesla Motors Club estimates while claiming that Tesla’s European deliveries could touch six figures this year. In the first 11 months of 2019, Tesla’s deliveries in Europe were around 87,500.

How about the Ford F-150 and Tesla CyberTruck battle?

Another long-awaited product from Ford to watch for is the electric version of the popular F-150 truck. During the first 11 months of 2019, truck and SUV sales in the US rose 3.4% while those for passenger cars declined by 9.8%. It’s natural that electric trucks would be the next big thing. Tesla and Ford, as well as their peers, are preparing for that trend to continue.

Tesla launched its CyberTruck in November. The CyberTruck made headlines as it secured over 250,000 pre-orders in a week despite many calling it a niche design. In November, Musk tweeted that Tesla CyberTruck is a “better truck than an F-150, faster than a Porsche 911.”

Also, Musk tweeted a video of CyberTruck pulling an F-150 uphill. Ford was quick to respond by tweeting, “send us a cybertruck and we will do the apples to apples test for you.” While the war seems on, the fully electric version of the F-150 is still a few years away. We will only see a face-off between Tesla CyberTruck and the Ford F-150 Hybrid in 2021.

Does Ford stock have limited upside?

Evercore ISI also pinned its downgrade of Ford stock on limited upside potential. CNBC’s Jim Cramer said the same thing last month. During Mad Money’s lightning round on December 17, he opined, “I don’t want you to own Ford, I want you to own the stock of Tesla.” He added, “I’m not saying one’s safer than the other, I’m saying they both have just O.K. balance sheets, but one’s got more upside.”

With fossil-fuel-powered vehicles falling out of fashion, Ford’s upside could come from electrification. The company has yet to demonstrate anything significant in that area.

Credit Suisse’s Dan Levy, who had good things to say about Mach-E, noted, “We believe Tesla is leading in the areas that will likely define the future of carmaking – software and electrification.” With respect to Tesla’s advantage in batteries, he added, “Tesla is likely ahead of others on batteries – the core of the electric powertrain.”

With players like Volkswagen going big on their EV push, the competition in the segment is only bound to rise. We believe that Ford needs to move faster on its EV initiatives to create more upside potential.