Ford (F) was downgraded to Equal Weight from Overweight with a maintained price target of $9 by analysts at Morgan Stanley Wednesday morning. The crux of the rating change related to Ford's electric vehicle strategy, which the analysts deemed as "still not fully clear" despite their acknowledgment that management understands how urgent this transition is. Morgan Stanley said they believe Ford can make the transition and leverage their strong fleet and commercial positioning through the F-150 and transit vans, however they said the company faces "substantial headwinds on high margin ICE [internal combustion engines] products that face de-adoption."
Indeed, it is true that General Motors (GM) , who Morgan Stanley contrasts Ford's EV business against, is further along in their electrification journey, but we think Ford has an excellent opportunity ahead of them given the fact that the F-150 and Transit represent two of the perhaps most important, highest-volume commercial vehicles in the auto industry. Plus, we think excitement could build as Ford begins deliveries of its first ever all-EV to market, the Mustang Mach-E, to customers in the United States and Europe. We think interest in the car has been positive based on management saying on the third quarter earnings conference call that "reservations have been very strong." The Mustang Mach-E will soon become available for sale in China, and we think this represents a great opportunity for Ford to tap into the largest EV market in the world.
Meanwhile, we know this new management team led by new CEO Jim Farley is taking aggressive, yet much needed actions aimed at boosting profits. Whether it be through restructuring underperforming parts of the business and getting out of low profitable vehicles or addressing a roughly $2 billion headwind related to warranty costs (see Tuesday's article from Reuters here), we believe Farley and his management are executing in building a new Ford that grows profitably and generates sustainable free cash flow. By accomplishing this, Ford will be able to allocate more capital towards further building out its EV presence, which we think will be positive for the stock and narrow the discount to GM's multiple. And don't forget, management plans on providing greater transparency and key performance indicators on its turnaround plan as well as financial targets next spring.
While we never like to see our stocks downgraded, especially one day after we initiated a position which we did in our Alert here, we'll take the other side of the trade here because we think our long-term thesis in F remains intact. We view a pullback nicely below our average cost basis as an opportunity to build a long-term position in this auto OEM.