Should You Buy Ford Motor Company Going Into 2017?

  • Ford reported strong sales growth in November.
  • Rising interest rates and political uncertainty are headwinds for Ford stock.
  • Ford stock currently has a dividend yield of 4.9%.

Riding on improving consumer sentiment, Ford (NYSE:F) brushed aside investors concerns by posting a much better than expected November sales number. The better than expected sales growth saw Ford stock gaining more than 4%. The stock is however down 11% YTD as investors are worried that US auto market has peaked for now. Also, the rising interest rates may adversely impact the stock. However, Ford's current dividend yield of 4.9% makes it a very attractive stock for income investors going into 2017 and the long-term growth story remains intact.

Improving Economic Conditions Will Drive Demand

The US economy grew by 3.2% in the third quarter, against analysts estimates of 3% growth. The after-tax earnings of US corporations rose 5.2% in Q3, growing for the first time since late 2014. The unemployment is at a multi-year low and the wages are rising. All these are feeding into consumers, resulting in rising consumer sentiment. The University of Michigan Consumer Sentiment Index rose to 93.8, one of the best readings in last 12 months. Improving economic indicators will increase aggregate demand. According to Mustafa Mohatarem, General Motors (NYSE:GM) chief economist:

“All economic indicators show significantly improved optimism about the U.S. economy including consumer and business sentiment, which continue to drive a very healthy U.S. auto industry,”, “We believe the U.S. auto industry is well-positioned for sales to continue at or near record levels into 2017.”

The industry expects the near record level of sales to continue into 2017. While it was an all-round show by Ford in November, two key segments which drove the demand were SUV's and "F-Series" trucks. SUV sales were up 20% while "F-Series" sales were up 11%, driven by low oil prices. But the crude oil price has jumped more than 15% after OPEC reached a deal for cutting daily oil production. The increase in oil prices may hurt the demand of the gas guzzling SUV's. However, shale gas production and President-Elect Donald Trump's energy policies will keep the oil prices in check. Also, the auto industry expects the demand for SUV's to remain strong in spite of the rising oil prices. (Also read: BlackBerry Might Gain From The Tesla Motors Inc Hack)

Investing In Future Growth

Ford recently announced that it will be borrowing $2.8 billion in 10 years and 30 years notes from the market. This is the first time the company is approaching the debt market in 4 years. The proceeds from borrowing will be used for investing in the new focus areas of electric and automated cars. The company said, in a recent statement, "Consistent with our recent investor day presentations, we continue to increase our investments in emerging opportunities, primarily in the areas of electrification, autonomy and mobility," .

For quite some time now Ford has been increasingly investing in emerging opportunities including autonomous cars. The company has announced its plans to roll out a fully automated car for commercial operations by 2021. According to Bloomberg, the autonomous car market is likely to be a $45 billion market by 2025.

The Down Side Risks Persist

The strong showing by the auto industry in November has taken many analysts by surprise. Ford sold 197,574 passenger vehicles in November, which is a 5.1% increase over the last year, handsomely beating analysts' consensus of 0.5% growth. This heavy beat has brought back investors to the stock with the stock gaining more than 4% since the news. However, the main question to be asked is whether this strong demand is sustainable?

In a statement Ford Vice President Mark LaNave noted that:

"Our outlook for the year remains unchanged at 17.8 million total vehicles. We had a strong sales in November, which places the year-to-date pace at a level consistent with the year ago, with 2015. "

While the company expects the demand to remain strong, it does not expect the November performance to repeat again. November performance was propelled by Black Friday deals and consumer incentives. According to Reuters "Hefty discounts helped boost November U.S. auto sales 3.7 percent,". These discounts are not sustainable in the long run and will negatively impact automakers' earnings.

Another risk facing Ford Motors is the rising interest rates. The yield on US Treasury bills have shot up since the elections to record levels, and the FED is widely expected to increase the interest rate in its December policy meet. Rising interest rates will hurt Ford's demand as it will increase the EMI's.

Strong Fundamentals

Ford Motors has strong fundamentals which will allow it to sustain its dividend payments. Ford generated more than $17 billion in cash from operations in 2015 and more than $5 billion in the latest quarter. In the first nine months of FY 2016, the free cash flow numbers came in at $8 billion. In comparison, Ford spent around $2.5 billion on dividends and buyback last year and around $600 million in the latest quarter. Even the dividend payout ratio is low at 35%. Ford's auto segment had $24.3 billion in cash and $13.1 billion in debt at the end of the third quarter 2016. So Ford has ample margin of safety to protect its dividends in case of adverse economic growth, which now looks increasingly remote. (Also read: Trump's Policies Could Massively Dent Ford Motor Company)

Ford Stock Is A Good Income Play

Ford reported strong growth in November sales, beating the analysts' estimates by a wide margin. The company also borrowed $2.8 billion to invest in its future growth. Ford aims to roll out a fully automated vehicle for commercial operation by 2021. However, challenges remain. It will be difficult to repeat the strong performance of November. The rising interest rates may impact the demand. Also, Trump's promise to tax imports from Mexico at a punitive rate will have a negative impact on Ford's sales. But, despite facing several challenges, Ford's fundamentals remain strong. Ford's current dividend is amply protected by its strong cash flows and low dividend payout ratio. Also, Ford is currently trading at much lower multiples. With a dividend yield of nearly 5%, Ford stock is one of the best dividend stocks going into 2017.

Looking to invest in auto stocks? Here are our latest Top Auto Stock Picks.

Kumar Abhishek Kumar Abhishek   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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