Ford’s Regime Change Fuels Earnings, Stock-Rebound Expectations

Ford Motor Co. is enjoying a run-up in its long-lagging stock as Wall Street sees stronger-than-expected third-quarter earnings leading to better times ahead under a new management team.

Since Chief Executive Officer Jim Farley took the wheel from retiring Jim Hackett Oct. 1, the automaker’s shares have soared 21%, signaling improved sentiment after a six-year rout. Analysts are increasing estimates, price targets and, in one case, upgrading the stock to a buy. That’s a reprieve for shares out of favor since superstar CEO Alan Mulally retired in 2014.

When Ford reports third-quarter results after the market close Oct. 28, it’s forecast to post adjusted earnings per share of 19 cents and earnings before interest and taxes of $1.34 billion, according to analysts’ estimates compiled by Bloomberg. That’s down substantially from 34 cents and $1.8 billion a year ago. But thanks to a resurgent auto market following a pandemic-induced drop in the spring, it’s better than initially expected when the company predicted its first annual loss in more than a decade.

Ford’s Regime Change Fuels Earnings, Stock-Rebound Expectations

Much of investors’ optimism is coming from the elevation of Farley. An intense former Toyota Motor Corp. executive, he’s seen as the high-octane antidote to Hackett, a cerebral leader whose tenure was marred by a botched launch of the Explorer SUV and an $11 billion global reorganization that’s too slow-paced for investors. Farley, in his first act as CEO, promoted company veteran John Lawler to chief financial officer, replacing former Inc. financial executive Tim Stone, whom Hackett hired last year.

“The Street is excited about Jim Farley being CEO,” said David Whiston, an analyst with Morningstar Inc. who rates the stock the equivalent of neutral. “Investors are looking for improved communication, more clarity and a more blunt style. Also, Farley’s passion for product is well-known. He loves to race.”

Adversity Overseas

But Ford’s recent rally is more than just personality-driven. Farley has been dealt a strong hand with three important new models -- a redesign of its top-selling F-150 pickup, the electric Mustang Mach-E and the revived Bronco SUV -- arriving as the U.S. auto market comes back faster than expected from two months of Covid-19-related factory shutdowns.

At the end of September, the annual auto sales pace in the U.S. had recovered to 96% of pre-pandemic levels, according to JPMorgan. Ford is running its pickup factories on overtime to meet demand, which helped improve free cash flow to $2.4 billion in the third quarter, JPMorgan estimated.

Ford’s Regime Change Fuels Earnings, Stock-Rebound Expectations

Ford still must deal with adversity overseas. It has been losing money in China, Europe and South America. Farley faces a tall order to turn around those operations, especially if the U.K. exits the European Union without negotiating an orderly transition.

Last year, the automaker said a no-deal Brexit would be “catastrophic” for the company’s operations in the U.K., where it is closing an engine factory. Ford also is scrambling to avoid fines for falling short of European environmental regulations after recalling plug-in hybrids that caught fire.

“Europe is still a big issue,” Whiston said. “There’s a lot of restructuring going on there and not for the first time.”

©2020 Bloomberg L.P.

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