Analysis: F DD AMZN

Shortly after the opening bell, we will be initiating a position in Ford (F) , buying 7,500 shares at a bid/ask of $9.04/9.05. Following the trade, F will represent 1.95% of the portfolio.

We are bringing F out of the Bullpen this morning. You can read about the company's much better than expected third-quarter earnings in the press release here.

From a higher level, we have been positive on the recovery in the auto sector since the summer (we have been playing it through DuPont (DD) ). Our thinking has been pretty simple. As the economy emerged from the second quarter lockdown and things slowly but surely got back to normal, one thing that people remain very wary of is public transportation and carpooling. Coupled with the fact of how people are fleeing urban areas for the suburbs in droves (a trend that could have lasting power even after the vaccine) and the need to get around, automakers have a lot of tailwinds going in their favor.

Fast forward to today, Ford 's third-quarter results were demonstrative of these recovery tailwinds, with total U.S. sales down just 4.9% year over-year, and retail sales down just 2.0%. Sales were up a huge 27.2% from the second quarter, and Ford said the "industry recovered at a stronger than expected pace, as the country continued to reopen." The highlight of the quarter was again pickup trucks -- with nearly a quarter-million (249,997) F-Series and Rangers sold in 3Q20, Ford's best quarter for pickup trucks since 2005!

More specifically, our bullish thesis on Ford is mainly predicated on the turnaround led by CEO Jim Farley and his new leadership team. Farley was named CEO of Ford in October, and as simple as this sounds, we think he is committed to making great cars, and more importantly, making money. This is not a novel idea, but until recently Ford did not mind selling cars that were losing money and in regions all across the world.

But losing money is not in Farley's DNA. On the third-quarter earnings call, he spoke about building a new Ford "that grows profitably and generates sustainable free cash flow, led by our automotive business. And we're going to allocate capital to the best and highest usage to drive sustainable value creation."

How does Ford plan on accomplishing this? Farley's three primary goals as laid out on the conference call include:

  • Competing "like a challenger, earning each customer with great products but as well services with rewarding ownership experiences."
  • "Number two...moving with urgency to turn around our automotive operations, improve our quality, reduce our cost and accelerate the restructuring of underperforming businesses."
  • "And third, we're going to grow again but in the right areas, allocating more capital, more resources, more talent to our very strongest businesses and vehicle franchises; incubating, scaling and integrating new businesses, some of them enabled by new technology like Argo's world-class self-driving system; and expanding our leading commercial vehicle business with great margins but now with the suite of software services that drive loyalty and generate re-occurring annuity-like revenue streams; and being a leader in electric vehicle revolution around the world where we have strength and scale."

Looking ahead, management plans on providing greater transparency and key performance indicators on its turnaround plan as well as financial targets next spring. We think this could be a very bullish event as long as management can lay out a credible path toward sustainable margins.

On their electric strategy, Ford plans to start delivering the first Mustang Mach-E to customers in the U.S. and Europe by year end. Reservations have been very strong for this car and the company has plans to sell into China. This could be a huge opportunity for Ford, especially with tensions between the United States and China potentially easing under a Biden Administration. In the pipeline, Ford is currently developing all-new electric versions of the popular F-150 and it recently unveiled the E-Transit cargo van.

It's also worth noting that Ford invested $500 million in electric automaker and automotive technology company Rivian in 2019 and has a strategic partnership with the company. Rivian is perhaps best known for its tie up with Amazon (AMZN) . In early October in the press release here, Amazon unveiled its first customer delivery vehicle built by Rivian. Amazon Founder and CEO Jeff Bezos has previously said he expects 100,000 Rivian vans to be on the road by 2024.

We are initiating the position with a $11 price target, which reflects roughly 10.5x 2021 consensus adjusted earnings per share estimates. That being said, we think there is more room for upside here should management demonstrate the company has much stronger earnings power than what investors are giving it credit for.