What’s the difference between a “cheap” stock and a “bargain” stock? A bargain stock is an equity the market underappreciates and is apt to go higher in the future. A cheap stock is an equity that might be less expensive (in terms of earnings) than its peers, but still is losing value because the company’s outlook is grim.
The two aren’t always easy to distinguish from one another either, and are often a matter of opinion.
Take Ford (NYSE:F) for instance. Given how Ford shares have peeled back from highs around $13 early in the year, and are hanging by a thread at a floor around $10 in the shadow of troubling news out of Europe, the stock’s demise is telling us the trailing P/E of 5.9 isn’t a bargain.
Ford’s cheap for a reason? I disagree. I’m looking at the numbers and the forecasts — among other things — and am convinced Ford is simply undervalued and due for a rebound.
My best bullish argument of all, however, isn’t one you can directly quantify on a balance sheet or income statement. In fact, it’s an argument I never thought I’d be making in support of any company.
First Things First
If you’re wondering whether I remember that Ford fell short of earnings estimates in all four quarters of last year, I do. But that’s not even the biggest problem in my book. The red flag for me is that each quarter’s income figure for 2011 was less than the comparable number in 2010.
The picture turned worse in the first quarter thanks to Europe, and the continent’s woes became an outright disaster for Ford’s most recent quarter. How so? Q1’s loss from European operations was “only” $190 million, versus what’s expected to be about a $600 million loss for Q2.
Here’s the thing: Overall sales still are growing thanks to other markets, and the U.S. market in particular.
While the company’s top line still is well under 2007’s peak sales and a little below 2008’s decent revenue, since 2009, Ford has managed to do the hard part of being in business in a tight environment: increase sales. Last year’s $136 billion was better than 2010’s $128.9 billion, which was better than 2009’s $116.3 billion.
But what about weakness in the European market? It’s a fair question, but perhaps born of excess concern. Though sales were down, its market share in Europe actually increased in Q1. And, as the second-best selling brand in Europe, any industry-wide stumble is more pronounced with Ford.
That’s not a dismissive attitude; the automaker has a real headache on its hands in Europe, and will have to deal with it sooner or later. Indeed, Ford has said the problem isn’t a cyclical one, but one of too much capacity.
On the other hand, it’s a little soon to pronounce Ford’s time of death. The company still has booked operating profits of around $1.5 billion the past couple quarters, and though losses stink, it can absorb Europe’s drag while it figures out how to whittle down that capacity.
Add in the fact that the auto industry’s unit sales forecast for 2012 was recently upped from 13.5 million to 14.4 million light vehicles (versus 2011’s 12.8 million), and what you have is a company with something to look forward to … even if the stock doesn’t imply it.
That’s not even the most compelling pro-Ford argument, however.
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