Morgan Stanley: Ford Primed To Be 'Valuable Part Of Auto 2.0'

The Street’s has a little too much faith in Ford Motor Company F, according to one team of analysts. But despite “elevated execution and cyclical risk,” Ford’s prospects aren’t exactly grim.

The Rating

Morgan Stanley’s Adam Jonas, Armintas Sinkevicius and Harald Hendrikse maintain an Equal-Weight rating on Ford with a $10 price target.

The Thesis

“We see a path to being a valuable part of the Auto 2.0 ecosystem, but investors may need to prepare for potential lower cash flow and balance sheet deterioration,” the analysts wrote in a note.

Continued participation may require strategic partnerships, a restructuring or exit of certain business, or deeper investment in new technology, and leadership will have to decide soon how it chooses to proceed.

“We believe management decisions in the next 6 months could set the tone for the stock over the next several years,” they wrote.

On the plus side, the analysts anticipate a halving of Ford’s dividend in 2019 as the automaker prioritizes long-term investments. Morgan Stanley would buy on the cut, interpreted as a sign of strengthened commitment to sustainable technology.

Additionally, they expect Ford to pursue significant restructuring through the next 12 to 18 months, including a 25-percent downsizing with 25,000 global layoffs, and to announce collaboration with Volkswagen VLKAY in autonomous, electric and commercial vehicles. The latter would support an anticipated shift from hybrids toward battery EVs.

To offset its forward motion, though, Ford remains unresponsive to concerns about the Chinese market, from which Morgan Stanley advises an exit.

“Based on our discussions with Ford, we are not convinced they see it the same way,” the analysts wrote. “In fact, at this stage, it appears Ford management may believe it can turn Ford China into a sustainably profitable business that creates positive economic value for shareholders. We currently value Ford China at negative $2 billion in our Sum-of-Parts model.”

Price Action

At time of publication, Ford shares traded at $8.50.

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