On a bright and promising day for the stock market, the Dow Jones rose 1.5% and Standard & Poor’s 500 close 2.4% higher, Ford Motor Company (NYSE: F) Stocks raced higher than most, advancing by a staggering 8.5% during the closing bell.
You can thank Morgan Stanley For this.
Investors were generally excited today, and there’s no doubt that optimism — after more than a week of nearly continuous selling — helped propel Ford’s stock higher. But Friday also turned up some good news all over Ford.
For the first time in 18 months, Ford’s stock fell below its $13 share price target “thanks” to a massive stock market sell-off in May. Finally, the banker had an excuse to remove the “underweight” (i.e. sell) rating on Ford stock and replace it with an “equal weight” (i.e. hold) rating, according to a note on StreetInsider.com today.
Of course, Ford stock ended the day at $13.50 per share on Friday. So does this mean that it is already too late to buy this car manufacturer? Is Ford’s stock now overpriced? Maybe, but maybe not.
This is more than a simple “target price”; Morgan Stanley actually values Ford stock along a range of possibilities, from $5 a share if the auto market continues to deteriorate, to as much as $25 a share if electric vehicles don’t replace internal combustion engines in trucks and SUVs as quickly as he bets most investors, And If Ford can also make a profit from its new electric projects. So, even though Ford is up 8.5% today, there is still up to 85% of the rally left!
And you know what? I agree with Morgan Stanley on this. In fact, I suspect the analyst is conservative.
At only 4.7 times earnings currently but paying its investors a generous 3% dividend yield, Ford’s stock doesn’t have to raise earnings much at all to justify its current stock price. (That’s lucky for Ford investors because, in fact, adjusted earnings are expected to grow only 5% annually over the next four years, according to data from S&P Global Market Intelligence.) But the really good news for Ford investors is that, despite its generally accepted accounting principles, (GAAP) earnings only, Ford is expected more than Double Free cash flow over the same time period to the extent that it generates an annual cash dividend of $12.7 billion by 2026.
That’s nearly 25% of what Ford is worth today, and Ford could be minting that much money in less than four years from now. I think the investors who are betting on Ford’s future today are making a very smart bet.
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Rich Smith does not hold a position in any of the stocks mentioned. The Motley Fool does not have a position in any of the stocks mentioned. Motley Fool has a disclosure policy.
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