- Ford stock has fallen 38% from its January peak
- Expected volatility is high
- The Wall Street consensus is neutral or bullish, depending on source
- There is a high level of dispersion among individual analysts’ price targets
- The market-implied outlook to early 2023 is bearish
Shares of Detroit automaker Ford (NYSE:F) have been in a precipitous decline since mid-January. After hitting an all-time high close of $25.19 on Jan. 14, the stock has fallen almost 38%. Ford reported Q4 2021 earnings on Feb. 3, with EPS 42.5% below expectations.
Source: Investing.com
While Ford has generated a lot of excitement around its progress in developing electric vehicles, as reflected in the huge rally in 2021, the trailing five-year total return on F is 7.7% per year, substantially lagging the auto manufacturing industry (22.6% per year) and the S&P 500 (14.1% per year).
While auto companies tend to have low valuations (with the exception of Tesla (NASDAQ:TSLA), of course), Ford’s situation is especially notable. The trailing 12-month (TTM) P/E is very low, at 3.62. For comparison, General Motors (NYSE:GM) has a TTM P/E of 6.19, Toyota (NYSE:TM) and Honda (NYSE:HMC) have TTM P/E ratios of 8.39 and 6.72, respectively.
Ford recently announced a plan to split off the electric vehicle side of the company into a separate business unit. This raises the intriguing possibility that Ford might spin out the EV business into a distinct company, although CEO Jim Farley has said this is not being considered.
On Sept. 6, 2021 the shares were trading at $12.89. They have since risen 22% (including dividends) as compared to a total return of -7.1% for the S&P 500. In that post, I assigned a neutral rating while the Wall Street consensus outlook was bullish and the valuation was low, the outlook implied by options prices was significantly bearish. I compromised with a neutral rating.
Many readers will not have encountered the idea that options prices can be used to build an outlook for a stock. The price of an option on a stock reflects the market’s consensus estimate of the probability that the share price will rise above (call option) or fall below (put option) a specific level (the option strike price) between now and when the option expires.
By analyzing the prices of call and put options at a range of strikes, it is possible to calculate a probable price forecast that reconciles the options prices. This is called the market-implied outlook and represents the implicit consensus among buyers and sellers of options on the stock. For readers who want a deeper dive into the theory, I recommend this excellent monograph from the CFA Institute.
It is not uncommon to have a bullish outlook from Wall Street and a bearish outlook from the options market as I did with DocuSign (NASDAQ:DOCU).
For F, over the past six months, the Wall Street consensus has been correct. A growing body of results after seeing this kind of disconnect between the options market and the Wall Street analysts suggests that caution is merited in these situations.
I have calculated the market-implied outlook for F to early 2023 and I have compared this with the Wall Street consensus outlook as in my previous post.
Wall Street Consensus Outlook For Ford
E-Trade calculates the Wall Street consensus outlook using the views of 16 ranked analysts who have published ratings and 12-month price targets for F within the past 90 days. The consensus rating is bullish and the consensus 12-month price target is 45.7% above the current share price. The 12-month consensus price target is below the high close from January of 2022. This suggests that the stock has been oversold at its current level. The highest individual price target is $30, 2.3 times the lowest price target of $13. This high degree of disagreement is something of a warning sign.
For my September analysis, there was far less dispersion in the price targets. Of the 16 analysts, eight assign a buy rating, six were neutral and two gave F a sell rating.
Source: E-Trade
Investing.com calculates the Wall Street consensus outlook using price targets and ratings from 21 analysts. The consensus rating is neutral and the consensus price target is 34.4% above the current share price. The highest individual price target is $30, 2.5 times the lowest, which is $12.
Source: Investing.com
A significant red flag in the analyst outlook is the high dispersion among the individual 12-month price targets. When there is a large amount of dispersion in the price targets, there is a negative correlation between the return implied by the consensus price target and the subsequent actual returns. In other words, a high implied return actually tends to predict a low future return and vice versa.
Market-Implied Outlook
I have calculated the market-implied outlook for F for the 10.2-month period from today until Jan. 20, 2023, using the prices of call options and put options that expire on this date. I chose this specific expiration date to provide a view to early 2023 because the options that expire in January have especially high trading volume and open interest.
The standard presentation of the market-implied outlook is a probability distribution of price return, with probability on the vertical axis and return on the horizontal.
Source: Author’s calculations using option quotes from E-Trade
The market-implied outlook to Jan. 20, 2023 favors negative returns. The probabilities of having a +10% or +20% return over this period are substantially lower than the probabilities of having a -10% or -20% return, for example. The annualized expected volatility calculated from this distribution is 52%, which is high for an individual stock, and is also higher than the 45% expected volatility from my September analysis. There is an estimated 1-in-5 probability of having a price return of -39% or worse over the next 10.2 months.
To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative return side of the distribution about the vertical axis (see chart below).
Source: Author’s calculations using option quotes from E-Trade
This view shows clearly that the probabilities of negative returns are consistently higher than for positive returns of the same magnitude (the dashed red line tends to be well above the solid blue line across a wide range of the most probable outcomes). The maximum probability corresponds to a price return of -25%. This is a bearish outlook to early 2023.
Summary
F has been very volatile over the past year, and expected future volatility is also high. The shares are 38% below January's high closing price. Q4 earnings, well below expectations, are a concern.
The Wall Street consensus outlook for F is either bullish or neutral, depending on the source of the consensus calculation. The consensus price targets calculated by E-Trade and Investing.com are 45.7% and 34.4% above the current share price, respectively. The substantial differences are due to the wide dispersion among individual analysts’ outlooks which, in turn, is concerning. The market-implied outlook to early 2023 is bearish, with high volatility.
Given the lack of consistency between different versions of the Wall Street consensus and the market-implied outlook, I am maintaining my neutral overall rating on F.