Ford Motor Company (ticker: F) is dominating the news headlines. Unfortunately, it was because of the death of William Clay Ford Sr., the living grandson of the company’s founder, Henry Ford, rather than a corporate achievement. But another thing that should be newsworthy to investors is that Ford’s stock price is very undervalued compared to its industry and the rest of the stock market.
Ford’s shares currently trade at a low price-to-historic earnings ratio of nine versus 12 for its industry and 18 for the S&P 500, according to Morningstar data. It trades at a price-to-book ratio of 2.3, which is slightly higher than the industry’s P/B of 1.6 but lower the S&P’s of 2.6. On a price-to-sales basis, Ford trades a steep discount compared to the stock market overall with a P/S of 0.4 vs. 1.7 for the S&P.
Ford is the second-largest U.S. automaker behind General Motors (ticker: GM), accounting for 10.5 percent of the U.S. auto market, according to Bank of America Merrill Lynch. Ford hails among the top five, dividend-paying plays on the stock market for Wyatt Investment Research based in Richmond, Vermont.
“Motor City has been roaring back to life, with new vehicle sales in the U.S. topping 15 million units in 2013,” Ian Wyatt, founder and Chief Investment Officer at Wyatt told subscribers March 5. “At Ford, U.S. sales rose by a solid 11%. That was enough to raise the company’s profits by 26%. After taking a dividend hiatus since 2006, Ford began paying a dividend again in 2012.”
The automaker doubled its dividend to $0.50 a share last year. Shares currently trade around $15 and therefore yield about 3 percent. Ford’s earnings per share are forecasted to zoom ahead more than 40 percent to nearly $2 a share next year, which will allow it to rev up dividends, Wyatt wrote. “With a decent yield today, Ford offers investors a bet on the recovery of the American auto industry and the possibility of much bigger dividend checks,” Wyatt wrote.
Fords’ profits will shrink this year because of the expenses related with rolling out a record number of new products and joint ventures in China, where it is jacking up production capacity, says S&P Capital IQ equity analyst Efraim Levy, who has a buy rating on Ford shares.
“Extra production down time as the company transitions to the new aluminum F-150 pickup trucks should penalize profits,” Levy wrote in an equity report dated March 7. “Losses in Europe should narrow, but still be significant. South American operations should see pressure.”
Levy projects Ford Motor Company’s profits will crash 23 percent year over year to $1.36 a share in 2014 and then zip up 41 percent year over year to $1.92 a share in 2015. The stock price closed at $15.62 a share Friday. It may be undervalued given the positive profit outlook for 2015.
“On the positive side in 2015, new product introductions, improved volume, more efficient capacity utilization, and cost cutting should benefit Ford,” Levy wrote. “Ford’s market share in the U.S. will be challenged by intense competition, but benefit from fresh products.”
Investing in Ford entails many investing risks such as lower-than-expected demand and production, rising raw material costs and the Ford family members having greater voting rights over other shareholders, Levy notes.The auto industry is heavily dependent on economic growth to drive sales. Ford shares could crash on fears of an economic slowdown even if the company is doing well, says David Whiston, an equity analyst at Morningstar.
U.S. automakers have been long market share to foreign automakers for years. In addition, they don’t have unions demanding higher wages and benefits that hinders Ford’s profitability.
With the average car on the road being more than 11 years old, U.S. light vehicle sales are forecasted to rise 3 percent to 16.1 million units, according to S&P Capital IQ. Extremely cold weather slowed U.S. vehicle sales in February. Sales were flat compared with the year-ago month at 1.2 million in vehicles.
“Both GM and Ford cited an improving sales cadence as the month unfolded and the final SAAR (seasonally adjusted annual rate) says to us that demand was affected by weather rather than that the recovery from the recession is running out of gas,” Whiston wrote in an equity report March 3. He also has a buy rating on Ford stock. “March may prove to be colder than normal but we expect some good news in auto sales once cold weather abates, as we think consumers are tiring of staying home.”
Of the 19 analysts who cover Ford Motor Company’s stock, five rated it a buy or outperform, eight rated it hold while one rated it sell, according to Thomson Reuters. Their target stock price ranges from $12 to $22 a share and $18 on average. Currently at around $15 a share, Ford’s shares are undervalued by 17 percent on average.
By Quynh Ho
Bank of America Merrill Lynch
Wyatt Investment Research
S&P Capital IQ
Thomson Reuters Knowledge