Piper Jaffray Likes Ford's Big Balance Sheet, Starts At Overweight

Piper Jaffray started Ford Motor Company F with an Overweight rating and $17 price target on "fair outlook, big balance sheet and 4.5 percent dividend yield."

"While the U.S. auto cycle is undeniably 'long in the tooth,' this doesn't necessarily imply an impending drop in vehicle sales. Stable demand in the U.S., rising market share in China and improving margins in Europe could combine to drive more earnings growth than is currently implied by PJC/Street estimates," analyst Alexander Potter wrote in a note.

"But even if not, Ford offers a 4.5 percent dividend yield (6.3 percent including the special dividend) to protect against downside," Potter added.

Geographical Focus

Potter expects North America to account for 67 percent of the company's revenue in 2016, while generating 5.5x and 10x more profit than China and Europe, respectively. The analyst expects stable margins in the U.S. and China JVs, while seeing potential upside in Europe.

In addition, Ford's European segment recently swung to profits and given recent tailwinds, the analyst said, "It's possible that our estimates don't fully capture the potential for margin expansion."

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Ford's multi-year target calls for 6–8 percent pre-tax margin in Europe, whereas PiperJaffray's model implies 2–3 percent.

In North America, the analyst expects Ford to deliver 4.4 percent more vehicles in 2016 versus 2015 (vs. an industry-wide increase of 2.5 percent), driven by a continued shift toward pickups and SUVs. A greater contribution from Class 5-7 trucks is likely to also help.

But, the analyst expects volume growth to decelerate to 2 percent in 2017 on lower ASPs, followed by flat growth in 2018.

In Europe, Potter forecasts Ford's wholesale deliveries to grow 4.7 percent, 4.1 percent and 2.7 percent in 2016, 2017 and 2018, respectively.

Potter said the stock's recent underperformance is due to building pessimism over the U.S. truck and auto cycle. But, he said this pessimism is overdone.

"While F might not regain its post-recession average multiple due to persistent investor concerns re: the cycle — we do think the valuation is likely to creep higher as it becomes evident that US auto demand will not experience a 'cliff event,'" Potter added.

Shares of Ford closed Thursday's regular trading session at $13.26 and were down 1.13 percent at $13.11 in the first minutes of Friday's regular session.