Ford Motor Company (NYSE:F) has a lot of positives that may make investors want to buy the stock. Or at least, F stock seemingly has a lot of positives. But, beneath what seems like catalysts for a higher share price are some troubling signs and explanations.
The good news when it comes to F stock includes valuation, profitability and the dividend. Right off the bat, Ford is quite profitable, with net income of $4.6 billion in fiscal 2016. The year prior, F hauled in $7.3 billion. Roughly $12 billion in profit over the last two years — despite the year-over-year decline — is still impressive.
In fact, over the last four years, Ford had net income of about $25 billion. That’s more than half its current market cap of $46 billion.
In addition to the company’s strong profitability is the dividend. F stock currently yields 5.17%, a hefty payout in almost any investors’ book. Also attractive to investors is the valuation. Shares trade with forward price-to-earnings ratio of just 7. That’s miraculously inexpensive for any company, let alone one that’s profitable and pays an attractive dividend.
Here’s the Problem
Ford might be cheap, but it’s cheap for a reason. After reporting operating income above $12.5 billion in fiscal 2013, F hasn’t been able to sniff that amount since. After generating earnings per share of $1.70 last year, analysts only expect earnings of $1.53 in 2017. In 2018, estimates only call for earnings of $1.60 per share, still below that of 2016. Sales are forecast to grow less than 1% total over the next two years.
When eyeballing the company’s valuation, it looks cheap. But that’s also deceiving. F stock’s valuation has actually gone up this year, climbing from a trailing P/E ratio of about 6x to more than 12x.
There’s only two ways to get a higher valuation. Either the share price has been climbing or the company’s earnings are declining. Guess which one Ford is? (The latter, for those who are unsure).
Additionally, it has operating margins of just more than 3%. Should Ford’s sales dry up even moderately, the automaker could suddenly find its bottom line in the red. With peak auto sales on investors’ minds, that’s not a comforting fact.
The Bottom Line on F Stock
While Ford looks like it has a lot of positives, I personally find them to be misleading. While the stock is cheap, one could argue that it needs to be even cheaper. Personally, I would rather find a lower payout in a safer company.
Ford recently shook up its management team, too. While this could lead to more positives down the road, I am skeptical it will provide an immediate boost.
When it comes to F stock, shares are actually looking better. Both times finding support near $11 (black lines), the stock has been on the mend. With that said though, F stock has a lot of overhang to work through. Resistance isn’t too far away (purple line) and the 200-day moving average will likely be a struggle too.
While profitable, F’s net income can be sporadic. Combined with little to no sales growth and a value trap status, I want to avoid Ford. In fact, if I have to be long an automaker at this point, it would be General Motors Company (NYSE:GM).