Anyone long on Ford Motor Company (NYSE:F) is going to have to be more patient than ever after F stock dropped on third-quarter margin compression and other concerns. But that doesn’t mean it’s not a bargain.
On a net basis, Ford reported income nearing $1 billion for the most recent three-month period, down from $2.2 billion the same time last year. Tough comparisons are partly to blame.
A year ago, Ford had pricing power with the popular new F-150 pickup truck. Net income also took a hit from recall expenses and costs to launch new products.
The net income line isn’t what Wall Street or the market really cares about when it comes to earnings, and on that basis, Ford surprised to the upside by a wide margin.
Ford (F) Stock Earnings Rundown
On an adjusted basis, per-share earnings came to 26 cents, beating analysts’ average estimate of 20 cents, according to a survey by Thomson Reuters. To be fair, the earnings beat was mostly driven by marketing and recall costs that were lower than expected. That’s not something investors can count on to be repeated.
Automotive revenue likewise exceeded the Street’s forecast. It fell 7% to $33.3 billion, led by a an 8% drop in operating revenue from North America. Analysts expected the top line to come in at $33.1 billion, excluding contributions from financial services.
The market was already discounting Ford stock for the coming plateau in the auto market following a record six years of growth. Weakness in North America, with its softer volumes and falling margins, makes investors even more nervous.
And the fall of has indeed been dramatic. In the most recent quarter, margins fell to 8.4% excluding recall costs. A year ago, it topped 12% helped by demand for pricier F-150s. Ford is pulling back on production this quarter to counter volume declines, but still forecasts margin declines for the full fiscal year.
Despite all that, the automaker reaffirmed its full-year 2016 guidance of $10.2 billion in adjusted pretax profit, which is somewhat reassuring as far as it goes. Beyond that, the most recent quarter is going to do precious little to boost sentiment on F stock, and that’s going to keep multiples down at value levels.
Ford Stock’s Compelling Valuation
In addition to a peak in the auto sales cycle, investors in Ford are casting a wary eye on some of its strategic ambitions. It’s plowing heavy investment into its aluminum-bodied Super Duty pickup truck, but at least that’s a core competency.
It’s also trying to rebrand itself as “mobility company,” however, occupying a central place in the future of self-driving vehicles. As Chief Executive Officer Mark Fields told Bloomberg:
“For the foreseeable future, we’re going to be in investment mode. Clearly the investments we’re making in emerging opportunities, whether it’s electrification or autonomy or mobility, will impact our earnings. Further out, those businesses will start to contribute to the company’s bottom line.”
The key to all this is whether F stock adequately prices in the risks of margin compression, softer volumes, a plateau in the cycle and heavy investments. At just 6.8 times forward earnings, it probably does. As one commenter put it, a price-to-earnings ratio that low “bakes in a lot of stupid.”
True, analysts give Ford a compound annual growth forecast of just 2.4%. It doesn’t deserve a big premium. Car companies don’t really get them anyway. But you can find other stocks with similarly low growth prospects commanding much higher multiples than Ford.
Multiple expansion isn’t out of the question in this market. It’s not exactly being stingy with what it’s willing to pay for future earnings. And then there’s the yield on the dividend. After the latest dip, Ford throws off more than 5%. That makes it very attractive to equity incomes investors and helps build a floor on the price.
Ford might not be the biggest bargain in the world, but it does look comparatively cheap and pays a generous dividend. As a high-yield long-term value play, Ford stock deserves a drive.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
