Ford (F), a member of Detroit's Big 3, trades at just about $10 and has a market cap of around $40 billion. Rival legacy automaker General Motors (GM) has a similar market cap, but trades around $30.
Ford went public in 1956 and offered 10.2 million Class A shares, offloading a 22% stake in the company. It was the biggest IPO in the U.S. until that time, and nearly 200 banks participated in the process.
Ford’s IPO Has Not Created Investor Wealth
The company priced the IPO at $64.50, and Ford had a market cap of over $3.2 billion on its first trading day. That year, the automaker was third on the list of Fortune 500 companies behind General Motors and the Standard Oil Company of New Jersey, the latter of which would become Exxon and subsequently ExxonMobil (XOM).
It has been 67 years since Ford went public, and the shares have risen at a CAGR of under 4%. Even if we add the dividends, the returns would trail what the S&P 500 Index ($SPX) has delivered over these years.
Why Is Ford's Stock Price So Low?
It might sound intriguing to many as to why Ford's stock price is so low despite being listed for over six decades. There are mainly two reasons for this. First, Ford has split its shares six times, with the most recent split happening in 1994. Second, and more importantly, the shares have not performed well and trade at less than one-third of the all-time highs they hit in 1999.
The shares have lost over 38% in the last 10 years, and 20% in the last 20 years. In fact, the shares hit $20 in late 2021 for the first time in two decades. However, they have since fallen, and after closing in the red in 2022. they are trading down in 2023 also.
With such a dismal performance on the charts, it is no wonder that F trades at a low price of $10.
What’s Wrong with Ford Stock and Why Is It Falling?
Ford generated revenues of just over $158 billion in 2022, which is lower than what it brought in at the start of the century. The company has exited several small and unprofitable markets - which, coupled with more or less stagnant sales in the U.S., has resulting in sagging top-line growth.
Despite all its efforts to transform the business and focus on cost cuts, Ford’s 2022 operating income was below what it was in 2000. To make things worse, the company trades at depressed valuations - which, again, is a function of its sputtering growth and the market’s perception of its outlook.
Think of it this way: the stock price of any company depends on how much it earns and what investors are willing to pay for those earnings (the price-to-earnings multiple). With Ford faring poorly on both variables, the stock price has sagged - and quite unsurprisingly so.
Will Ford Stock Reach $100?
At a stock price of $10.31, Ford commands a market cap of $41.3 billion, and if Ford stock were to reach $100, its market cap would be around $400 billion. To be fair, it wouldn't be prudent to expect Ford to reach $100 anytime soon, and even Toyota Motors (TM) - which is the most valuable legacy automaker - has a market cap below $300 billion.
Another analogy, however, could be the comparison with Tesla (TSLA), which currently has a market cap of around $700 billion. However, at its peak, the Elon Musk-run company was worth more than $1.2 trillion. For perspective, no other automaker in history has ever commanded a market cap of $1 trillion.
But then, Tesla’s mammoth valuation is not solely due to its electric vehicle (EV) business, and by Musk’s own admission the company’s valuation is dependent on its autonomous driving business – a view shared by those analysts and fund managers who are bullish on Tesla.
Ford, meanwhile, scaled down its bet on autonomous driving, and last year wrote off its $2.7 billion investment in autonomous driving startup Argo AI.
How High Can Ford Stock Realistically Go?
This is not to say that Ford stock is not a good investment. The Street-high target price of $20 implies expectations for the stock to almost double from these levels, and even the mean target price of $14.42 is almost 40% over current prices.
I believe that Ford stock looks quite undervalued based on its next-12 months (NTM) price-to-earnings multiple of 6.76x. Notably, the valuation should be seen in the context of the losses at its EV business, which Ford expects to post a pre-tax loss of $4.5 billion in 2023.
To be sure, Ford has been quite candid about the challenges that its EV business faces and is also simultaneously focusing on hybrids. It delayed a $12 billion investment in its EV production capacity, and is maintaining flexibility about its ambitious EV production targets. The EV market turmoil should continue for some time, which would mean continued losses at Ford’s EV business, as well.
However, I believe Ford stock should deliver strong returns over the next couple of years, given the low valuations and Ford’s strong product portfolio - which includes the F-150 pickup, America’s best-selling pickup for almost five decades. While expecting the stock to reach $100 anytime soon would be a bit too optimistic, the stock can still deliver the goods for 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.
