Ford’s F-150 Is a Hit: So Why Is Ford Stock so Low?

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Ford Motor (F) has a huge hit in the new aluminum-bodied F-150 pickup, some healthy margins and record quarterly profit in The States, so what gives with Ford stock?

Ford's F-150 Is a Hit: So Why Is Ford Stock so Low?Ford got a nice boost on the second-quarter earnings news, but the stock is still negative for the year-to-date. And Ford’s forward price to earnings multiple of less than 8 is ominously low. (That’s half as cheap as the broader market, despite the fact Ford has a much higher growth forecast.)

That ultra-low P/E is the Street’s way of saying that it has a pessimistic view of the risk-reward potential of Ford stock. Although this isn’t particular to just Ford, as General Motors (GM) also changes hands at about 8 times forward earnings.

While sure it’s true that stocks become cheap because of an underlying business issue, but the Ford earnings report on Tuesday was good enough to show that Ford stock is indeed a bargain, not a value trap.

After all, the consensus is that Ford stock is a second-half story. The new lighter weight F-150 is racing off dealers’ lots even before they have a chance to backlog a decent supply. That means Ford can expect accelerating sales in the fall, especially with new versions of the Edge and Explorer also reeling in buyers.

Good news for Ford: gas is cheap. So customers are opting for the fully loaded — and higher margin — version of the F-150.

Yet in spite of all this, Ford stock is still languishing.

Ford Stock Deserves a Higher Multiple

Ford stock faces a number of headwinds, and Ford earnings reflect that.

Ford profits jumped 44% on a net basis. Operating earnings of 47 cents a share beat the Wall Street estimate by 10 cents, according to Thomson Reuters. And, as mentioned above, North America enjoyed record results.

That’s all genuinely good news. More troubling is that North America is responsible for essentially all of the growth. Europe, South America and the Middle East & Africa regions were all duds. Even worse, China — the world’s largest car market — continues to weaken, hurt by the country’s economic slowdown and plunging stock market. The car industry is counting on China to drive most of its growth over the next five years or more.

Ford is also overly dependent on the F-150. Morgan Stanley analysts say the popular pickup truck is responsible for 90% of Ford’s global auto profits.

The stronger dollar remains a risk, as it’s still leaning on Ford’s top line. Further, the company’s contract with the United Auto Workers is up for renewal, so that adds another layer of uncertainty.

However, the reason Ford stock has been having a hard time is because the market likely got tired of waiting for the ballyhooed launch of the new F-150. But the F-150 is a great success so far and it’s still in first gear. The company is also beating its margin targets. With a forward P/E of 8, it appears the market is obscuring the good and emphasizing the bad.

If Ford earnings retain this kind of momentum throughout the second half of the year, it stands to reason that the market will at last give Ford stock a higher earnings multiple.

Perhaps Tuesday’s action will prove to be the beginning of a breakout for Ford stock.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned earnings.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/ford-stock-earnings-f/.

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