Should You Invest in Ford Stock Now?
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Are shares of Ford a good buy or is more pain to come for investors?
The Ford stock price has plunged 40% over the last five years and new car sales just hit their lowest in six years last quarter. Part of the problem is industry-wide but Ford management has made its share of fumbles as well.
Are shares of Ford finally a buy or will they continue to fall? What are the signs you should watch for to know when to invest in Ford stock?
I’ve found a few reasons though that could push shares up 20% or more in the next year on top of Ford’s huge 6% dividend yield. I'll run through a complete analysis and share what I look for as a professional analyst.
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Is Ford a Value Stock?
Those of you in the community know I love deep value dividend stocks and few are as deep value as Ford Motor Company. With the share price about a tenth of what it was in 2011, I think there is a lot of upside in one of America’s oldest car companies.
In fact, I recently put Ford in a seven-stock portfolio of must-own dividend names and added it to our 2019 stock market challenge portfolio. In this video, I’m explaining why I think Ford could turnaround an eight-year losing streak and how high it can go.
Ford has a tempting 5.9% dividend yield but it’s all been eaten up by a massive stock price loss over the last five years. To be fair, it’s not just Ford but the entire auto industry with the First Trust Global Auto ETF down 15% over the last five years against that tragic 39% plunge in Ford shares and a 48% gain in the S&P 500 over the period.
But that dividend isn’t the only thing attracting investors to the shares. This graphic shows the price-to-earnings on Ford shares over the last three years, trading for as low as six-times earnings and as high as 10-times. Shares now trade for just 7.8-times the company’s earnings over the past year but what the chart doesn’t show is that if you go back to 2014, it was trading for 115-times earnings and even higher than that just after the recession.
In fact, shares reached $99 in 2011, nine-times their current price.
Now I’m not saying Ford’s stock price will ever be anywhere near 115-times earnings again or even half that, but this stock is definitely in deep value territory.
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Ford Earnings and Stock Price
Earnings are expected almost 4% higher over the next year to $1.35 per share. Revenue on the other hand is expected to remain sluggish at $144.9 billion, a 1.1% decrease from sales over the last four quarters.
Now if we go back to that chart of earnings estimates for Ford, we see that results have been all over the place. This isn’t like what we saw with Apple where management does a good job of managing and beating expectations. Ford has missed earnings expectations in three of the last eight quarters but has also beaten big time in a few of those quarters.
So it’s a little harder to estimate what Fords earnings will be because of that inconsistency but we’re going to talk about that massive 63% earnings beat last quarter and what we can expect over the next year.
So any way you slice it, Ford is a value stock but the problem when you’re investing in these deep value names is timing. Shares have been plunging for the better part of eight years so why should we think Ford can turn it around now?
Will Ford continue to drop or will it be like shares of Hanesbrands, ticker HBI, the top-performing stock in our 2019 Dividend Portfolio. Hanesbrands had been falling since 2015 with a 65% slide through last December but has since rebounded more than 50%, helping our portfolio beat the market.
Ford Stock Outlook
So we need to understand why shares of Ford and the rest of the automakers have been plunging, why they might turn around and catalysts for that to happen in 2019.
And this market analysis is probably the most important piece for Ford because that overall auto market is having such a big effect right now.
The Cash for Clunkers and other post-recession programs led to a surge in new car sales from 2010 through 2015, rising from just 10 million units to over 18 million new cars sold annually. The problem is that sales in the US have tanked for the last three years.
Sales of cars and light trucks were down 2% in 2017 and flat last year. JD Power reported that first quarter sales fell below three million units for the first time in six years.
Higher prices have helped moderate that volume decrease for auto-makers. The average new car price hit a record $33,300 this year but it’s also contributing to the problem. Since wages haven’t really increased, lenders have had to extend out loan terms to 72 months to keep monthly payments low for buyers. That helped encourage sales but can only go so far.
So you’ve got this massive wave of cars that were bought just after the recession, these cars are now on the used car market and weighing on new car sales.
There is reason to believe that Ford can come out of this crisis though and management is making the tough decisions to turn it around.
Ford Stock Fundamental Analysis
Management has done a decent job of cutting costs but knows it has to do more. The company has gone from making cars on 27 platforms in 2007 to just 9 today which gives it a lot more flexibility and efficiency.
Ford has a solid year planned for product launches including the Explorer and a new super duty truck later. We’ve already seen some good numbers from the launch of the Ranger and the company’s most profitable model, the F-150 gets a redesign next year.
The first quarter results were a huge surprise and started to show that the company’s three-year restructuring program is finally taking effect. Earnings before interest and taxes, so that EBIT measure, jumped in the first quarter to $2.4 billion from just $1.5 billion last quarter. A lot of this was on a big move in profitability from just 3.5% EBIT margin to 6.1% which is a huge move in one quarter.
This was all part of a three-year plan to shave up to $25 billion in costs off the bottom line and full benefits are expected to be realized through 2022. So even if the overall market for new cars doesn’t improve, we could see stronger earnings from Ford.
Ford Dividend Analysis
For its dividend, Ford generally pays a $0.15 per share payment three quarters of the year and then declares a larger dividend in the January payment depending on cash flow. On that industry weakness, it didn’t do that this year and we’d probably be safe to assume it won’t next year either.
That’s going to mean a $0.60 per share dividend for 2019 which is still nearly a 6% dividend yield though it’s quite a bit off the $0.85 per share paid in 2016. We see here that Ford has been pretty sporadic with its dividend payout, growing the payment in three years and dropping it in two of the last five.
On that current dividend, the company is paying out 65% of its net income. That’s dividend payout ratio that probably isn’t sustainable over a long time. Now I know a lot of analysts point to solid free cash flow reported but if you remove other cash payments like pension and separations, the actual cash flow comes in below the $2.4 billion needed to support the dividend.
Rock bottom interest rates have helped Ford and the other auto-makers stay afloat and the company has borrowed a net $47.7 billion over the last five years. Now this is where it gets a little scary for investors because the company owes over $100 billion in long-term debt, more than twice the market value of the shares.
The company has $34 billion in cash on the balance sheet and about $80 billion in other current assets so that’s likely enough to support the dividend and other cash costs around the restructuring program for a few years while the company works its way to better profitability.
Over the longer-term, there’s reason to believe that Ford is further along in electric and autonomous vehicles than the market is giving it credit. The company plans on launching a fully self-driving commercial truck in 2021 and is developing a Level 3 autopilot system for consumer vehicles.
The company is launching a Mustang-inspired crossover electric with a 300-mile range in 2020 as well as an electric version of the F-150 soon. Management expects to have a lineup of 40 electric vehicles by 2022.
Ford Stock Price Target
Putting all this together can give us an idea of where the Ford stock price goes from here and price targets.
Ford is a pretty widely covered stock with 12 ranked analysts offering targets. Itay Michaeli at Citigroup has the lowest target at $10 per share and a hold rating right around the current price. John Murphy at Merrill Lynch has a buy rating and the highest target at $14 per share.
I think Ford could run to $12 a share and even higher over the next year barring a big drop in the economy. There’s a good chance earnings surprise to the upside for $1.50 in profits per share and it would only take an 8-times PE ratio to get to that $12 target. With this kind of improvement in earnings and profitability, investors could come back in a big way and push the shares even higher.
I'm following this Ford stock analysis with a review of Apple and will be doing more of these stock price reviews in the future. Make sure you click subscribe and join the Let's Talk Money community so you don't miss a single stock pick.
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