Ford Stock Is Not A Buy At Current Valuations

  • 2015 results may be strong compared to last year but over a 10 year period, some of its fundamental metrics are still falling.
  • In 2012 operating margins and net income were better despite the stock trading at similar levels - $14 a share.
  • Sub-prime loans

Many Ford Motor (NYSE:F) bulls can't understand why the stock is down 10% year to date especially when you consider the bumper quarters this company has enjoyed. Last quarter the company reported net income of $1.9 billion or EPS before special items of $0.45. In the same quarter 12 months ago, the company posted net income of $833 million which again illustrates the earnings growth path the company is currently on.

Better pricing and higher shipments were the main reasons for the huge growth in net income in the third quarter but the Ford stock still sold off more than 5% after earnings as it missed analysts expectations due to higher than expected taxes.

On the earnings call, the company stated that the slight earnings miss was the reason for the stock sell off but I think there is something more going on here. Why? Well in the second quarter of this year, the company announced $1.88 billion in net income or an adjusted EPS of $0.47 (see chart) which was a significant earnings beat but the stock still wasn't able to rally on the news.


So the question remains - What does Ford have to do to get its stock back up to $20 a share? The company pays an attractive dividend of $0.15 a share which equates to a 4.29% yield. I may be a lone voice here but if Ford stock can't rally now, what would happen if the US were to enter a recession and customer credit contracted? The US on average has a recession every 6 years. It has been 8 years since our last one which means we are due one any time soon. In any event, value investors are still staying away from Ford stock despite have a low price to earnings ratio and a high dividend. Here in my opinion are some reasons why...

Ford's Track-record Doesn't Inspire Confidence

Firstly we have to look at the Ford stock's history to explain why value investors are not interested at present. Dividend investors will note the dividend was halted in 2006 and was re-initiated in 2012. This is the first reason why growth investors would be staying away despite the current high yield. Below are more of its important fundamental metrics over a 10 year period.

Years Of Dividend Increases 4 Years - Pass
Free Cash Flow $8.7 billion (10-Year Trend Is Down) - Fail (Very Important For Dividend Investors )
Revenues $145.2 billion (10-Year Trend Is Down) - Fail
Gross Margin 16% - (10-Year Trend Is Up) - Pass
Price History of the stock Up 70% in the last 10 years excluding dividends - Pass
Healthy balance sheet Total assets = $219.4 billion (10-Year Trend Is Down) - Fail
 Net Income $4.77 billion (10 Year Trend Is Up ) - Pass
Resistant to recessions? Revenues fell from $172 billion in 2007 to $118 billion in 2009. Stock price dropped from $9+ a share in 2007 to $1.40 a share in 2008 - Fail

The numbers never lie. Half of the company's most important fundamental metrics over a 10 year period are falling. The last metric "resistant to recessions" is probably the prime reason why investors are not that attracted to this stock. If a recession struck (which could happen if the Fed raises rates) and sales fall, I see the dividend being cut (as the company has done before). This is why this company will find it difficult to compete with the likes of McDonalds (NYSE:MCD) and Procter & Gamble (P&G) (NYSE:PG) who despite having their own rough times have always raised their dividends consistently every year.

Ford Is Fairly Valued

The second point I want to address is Ford's valuation which to many appears cheap. Ford currently is trading with a current price to earnings ratio of 11.6 and a forward price to earnings of 7.3. Paying under $12 for every $1 of profits the company generates seems cheap but we have to go deeper. Firstly Ford's 5 year price to earnings average is 8. In fact Ford's Price to earnings ratio hasn't been this high since 2009 when it was also 11.6 (Year end numbers).

Furthermore revenues might have grown since 2008 but operating margins and net income numbers tell a different story. Ford bulls compare this year's figures to last years (2014) which are undoubtedly better across all main metrics (Revenue, net income, operating margins, etc). However if you compare 2015 figures to 2012 figures (where Ford stock ended out the year at around $14 a share) things look entirely different. Ford ended 2012 doing $5.6 billion in net income on $134 billion in revenues. This gave the company an operating margin of 4.7% for 2012 and remember the stock was trading at the same levels as we are at today.

Fast forward to 2015 and the company is expected to do $4.7 billion in net income on a little over $145 billion in revenues, giving the company an average operating margin of 4.1%. What's the takeaway here? Ignore top line results and don't just compare earnings with the previous year. This company is currently trading at $14 a share because that's what the market believes its worth - based on past numbers and forward looking guidance.

Risk From Sub-prime Lending

Finally regulators have finally raised a red flag on auto lending and the reasons are clear. During the first part of 2015, lenders gave out more than $56 billion in sub-prime loans which is a 13% increase over 2014. Secondly almost a third of new cars sold in the second quarter of this year have loans of up to 7 years which again illustrates that some buyers should not be getting credit.

The sub-prime mess in the housing market in 2006 seems to have transferred over to the auto sector which is why I believe the auto-mobile industry would be one of the first sectors to crack if the US were to enter a recession. Zero percent interest rates and desperate banks have been the primary culprits of the ensuing auto credit bubble. Eventually the chicks come home to roost.

Ford Stock Has Downside Risk

To sum up, I believe Ford stock is fairly valued and more risk exists in my opinion to the downside. The company is not diversified when you compare its US sales to internationally. Its a pure US play which again elevated risk. It's long term fundamentals are weak and its 2015 momentum has been mainly propped up by cheap credit and cheap oil. Don't get lured in by the dividend and perceived low valuation.

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Comments on this article and F stock

user profile picture
The ten year period in question includes the global economic meltdown, and the end of the "old Ford" and beginning of the Way Forward / One Ford strategy, which has profoundly changed the way Ford does just about everything. The past 5 years, Ford has moved from tenous to shaky, to solidly profitable. I'm beginning to think you have some sort of short position as much as you seem to be pumping this doom and gloom thesis. The fact is Europe and China are improving, Ford is finding a nice RnD groove. Ford is poised to have several back to back years of $2+ EPS, with historical PE's (excludign the worst part of the meltdown) near 10. That says it at least stabilizes where it is. With any dividend hike, likely in early Jan, there will also be price pressure upward. Also, the RATIO of prime to subprime loans is virtually unchanged in 15 years, even if more DOLLARS are subprime (even MORE dollars are prime). Re the PE, there was a massive charge off in 2012 I think, and after January earnings, $1.65 with a PE of only 9 would be at least around $15, or PE 10 is $16.5. We'll split the difference and say $15.75 - not counting a likely $.10 div hike in early Jan. At $.70 if the div that represents 4%-5% payout, it is anywhere between $14 and $17 a share, we'll split the difference and say $15.50. So very near term, we're very easily looking at $15.50-$15.75, with further growth in '16 and '17.
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user profile picture
I live in europe and when you consider cheap gas, cheap credit and incentives to buyers to purchase new cars, I believe the industry is not in as great shape as many would believe

I agree with you about Ford numbers - so why isn't the share price moving. What does the company have to do to move the share price. If its performance is like this when it is having record quarters, what would happen in a downturn?
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