Ford Motor Company (NYSE:F) has been on the outs for a few months now. Despite record U.S. auto sales in 2015, Ford stock has been under pressure for some time along with the shares of its fellow major automakers.
Specifically, Ford stock is down 23% in the last 12 months compared with jsut 7% declines for the S&P 500. Peers General Motors Company (NYSE:GM), Honda Motor Co Ltd (NYSE:HMC) and Toyota Motor Corp (NYSE:TM) are all down over 20% each as well.
In recent weeks, however, Ford has bounced back a bit after the initial reaction to its fourth-quarter earnings report. That may lead some investors to think that they should sell out on this rebound and finally head for the exits.
But that would be a mistake. Ford stock still has more room to run in 2016, and here’s why:
Ford Stock Offers Value
For starters, Ford is doing its best to do right by investors with ambitious dividend and buyback plans. In 2015, Ford stock increased its dividend by 20% to 15 cents a share, and then this January, the company announced a big special dividend of 25 cents per share on top of those payouts.
And those regular dividends are very sustainable as Ford tracks nearly $2 in earnings per share in fiscal 2016.
In fact, many investors may not know how strong the automaker’s financial performance has been lately. In Q4, Ford handily topped expectations with earnings of 58 cents per share — and its full-year profits set a record thanks to the strong U.S. market in 2015. That’s no mean feat considering the strong dollar offsetting sales overseas and continued weakness in Latin America thanks to macroeconomic and political issues at play there.
In short, this is not a failing industrial company, but rather a well-run multinational that continues to create good value for shareholders.
The Death of Auto Sales Has Been Greatly Exaggerated
Car sales are indeed cyclical, and that’s worth considering. However, the broader negativity around Ford, GM and other auto stocks seems to be something more than just a fear of a short-term downturn.
The bears continue to insist that we have reached “peak car” and that the cycle of sales is bound to ebb going forward. Those fears, driven by the rise of the likes of Uber and Zipcar, have led many to give up on auto stocks — and is a big reason the forward P/E of Ford is about 6, and that the forward P/E of GM is close to 5.
Yet the trend of millennials shunning cars appears to be overblown. Automakers had a record year in 2015 in part because millennials took to the roads. In fact, millennials passed Gen X in the share of car buyers back in 2014 — and this spring, millennial buyers shot up to a 27% share from 18% in 2010.
What’s more, the continued technological innovations including advanced electric vehicle systems and Wi-Fi hotspots within cars makes new models even more compelling to consumers with each passing day. We may not see another record in 2016, but it’s not like cars are becoming irrelevant. If anything, they are becoming more interesting than ever.
The icing on the cake is that cheap oil has allowed a resurgence in bigger vehicles that offer bigger margins, particularly Ford’s trucks and SUVs. In fact, Ford is planning four new SUVs to roll out in the next few years, and that could significantly juice profits.
In short, the death of the car is just a lot of hysterics.
And from an investing perspective, the stagnation of Ford has also been exaggerated. While there may not be breakneck growth here, the big dividends and bargain valuation make it a lock for long-term investors.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
