- Ford will invest $1.8 billion in China over the next 5 years. The auto-maker believes it has the product line to compete with the best in this market.
- Ford Credit is now the company's most valuable division. New automobiles need to be sold consistently for this division to keep producing stellar numbers
- If the stock drops to under $10 despite reporting positive earnings growth, one would feel that both yield and value investors would start scaling into the stock which should put a floor under the price.
Mr Market just doesn't seem to think Ford Motor (NYSE:F) can turn around its fortunes in the near term. Some investors have found this baffling especially when you consider the stock is down 10%+ year to date despite the company releasing bumper earnings all throughout 2015. Investors seem to have resigned to the fact that positive earnings growth from here probably wont be enough to rally the stock past $20 a share.
The company has already stated that guidance will be weaker than originally expected for its next quarter earnings so shareholders would not have been impressed when auto sales dropped in October. The decline was surprising especially when you consider that the automobile manufacturers reported strong sales in October. Furthermore, the auto company is presently launching one of its biggest sales campaigns since the great recession which again has raised a few questions among investors. Is the company going after market share in an uptrending market or does the company want to capitalize on the industry's strong growth rates which inevitably will have to decline? One thing is for sure. The US is critical to Ford and if a slowdown comes here faster than expected (something which Mr Market may be predicting), this stock could get very cheap all of a sudden. The street gives precedence to companies which have debt under control and have predictable growth rates. Obviously Ford is doing something wrong in the eyes of the market. Let's discuss some areas where it could make some inroads which would be positive for Ford stock price.
Firstly, the east and specifically China holds major potential for Ford because of the sheer size of the market. Ford increased its market share to 4.7% in Q2-2015 (only a 0.01% increase on a rolling year basis) but expects strong growth for the rest of the year due to product launches and more volume. Market share should definitely increase going forward due to the company earmarking $1.8 billion for investment in the region over the next 5 years. Another plus the company has in China is that its products are generally on the lower end price wise and mostly are tailored to the lower middle class and working class. Therefore, if China continues to slow, Ford believes it will be able to gain market share as customer shift to lower priced economical products. I also think that Ford's investment in China is coming at the right time when you view the auto-sales surge in the region which are a result of the government granting tax relief to buyers. If this trend continues, I have no doubt Ford can increase its sales meaningfully in the region. The market obviously believes growth rates in the US can't be improved meaningfully but China is a totally different market. If meaningful growth rates can be reported here, Wall street will definitely take notice which would lead to a rally in the Ford stock.
Secondly, and the market may have this wrong is Ford's high debt load. At the end of the third quarter, long term debt stood at $126 billion which seems extraordinarily high. However, the company's vehicle financing business is responsible for the vast amount of its debt as the company basically borrows money and then loans it out to customers as auto-loans. This division has become the most profitable division within the company as the auto-maker earns profits from the sale of the vehicle as well as the financing. Vehicle sales growth will definitely drive the finance business going forward and we can already see signs of the finance business opening up more in Asia which is bullish for the company going forward. However, shrewd investors know that a thriving finance business is a double edged sword in that it brings leverage to the table. In the US for example, we have low unemployment, low oil prices and low interest rates all of which have fueled a mini auto boom. If any of the above metrics were to change, Ford's sales would probably suffer more than its peers due to its reliance on its finance division for EBIDTA margin. This is why, I believe, the street would change its sentiment about Ford if the world economy grew at a healthy percentage once more.
On the valuation side, this stock definitely looks cheap at a forward price to earnings ratio of 7.26 plus it pays out a dividend yield of 4.28%. The opportunity here for investors is if the stock price continues to slide even with the company continuing to experience record sales growth every quarter. A falling stock price generally means a higher dividend and Ford's free cash flow ($8 billion+ for 9 months ending Sep 2015 ) and its relatively low pay out ratio (31%) confirm to me that the company will continue to pay good dividends, going forward. Dividend investors would then invest in Ford stock not just because of the yield but also because it is a cheap stock (currently under $15 a share)
To sum up, it is quite clear that the street doesn't favor Ford's prospects going forward. The company definitely has some inherent risks but also large potential especially in international markets where its market share is still quite small. If Ford can start growing its market share in these markets meaningfully, I'm certain the street would change its sentiment on Ford stock. The further the stock drops, the more value and dividend investors will become interested in this stock. Wait for an inflection point as we clearly haven't arrived at one yet.