Ford Motor Company (F) Stock Offers a Lot of Long-Term Value

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Ford Motor Company (NYSE:F) stock has been falling so far today, even after the Detroit-based automaker topped Wall Street’s second quarter expectations on both the top and bottom lines. Under new leadership, there’s still doubt that F stock has enough in the tank to go the distance — at least in the near term. But buying on this dip can also pay off.

Ford Motor Company (F) Stock Offers a Lot of Long-Term Value

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Despite better-than-expected earnings released on Tuesday by rival General Motors Company (NYSE:GM), GM stock still reversed course, falling as much as 1%. But, F stockholders still have tons of reasons for optimism, particularly from the standpoint of Ford’s improved profit margin, which was instrumental in Wednesday’s bottom-line beat.

Ford’s All-Around Solid Quarter

For the three months that ended June, Ford reported second-quarter profit of $2.04 billion, or 51 cents per share, rising from last year’s Q2 profit of $1.9 billion, or 49 cents per share. On an adjusted basis, this comes out to earnings per share of 56 cents, which is not only 4 cents above last year’s 52 cents per share, it was also enough to beat consensus estimates of 43 cents per share.

Such a strong beat was impressive, particularly given the headwinds Ford has had to deal with in terms of its leadership change. Plus, Ford also suffered from lower adjusted pre-tax profit of $2.5 billion, compared to $3 billion last year. The company cited factors such as higher steel costs and unfavorable exchange rates.

Nevertheless, ahead of the quarter there were concerns about slumping auto sales. The industry had become saturated as most consumers who are willing and able to buy a new car had already done so over the past year or two. This means, since consumers were in relatively newer vehicles already, there wasn’t that pent-up demand for a new purchase. Wall Street has become concerned that this may be the case for the next two years.

Still, second-quarter revenue of $39.85 billion grew almost 8% year over year, topping last year’s mark of $36.93 billion and also beating Street forecast of $37.1 billion. Notably, the revenue beat comes even as the annualized pace of new car sales in the United States has scaled back to around 17.1 million, as of the most recent period.

But here’s the thing: Amid the recent drumbeat about “peak auto,” Ford continues to make moves to turn things around. At the same time, unlike competitors such as Honda Motor Co Ltd (ADR) (NYSE:HMC), Toyota Motor Corp (ADR) (NYSE:TM) and the aforementioned GM, Ford hasn’t used incentives to boost revenue for its best-selling F-Series pickups, nor on Ford-brand car models. The company reported that average transaction prices rose nearly five times the industry average and incentives declined, even though incentives rose for the industry overall.

CEO Jim Hackett said in a statement:

“This quarter shows the underlying health of our company with strong products like F-Series and commercial vehicles around the world, but we have opportunity to deliver even more. The entire team is focused on improving the fitness of the business and smartly deploying our capital to improve both the top and bottom lines in the quarters ahead.”

Looking Ahead for Ford

In terms of outlook, Ford expects full-year earnings per share to range from $1.65-$1.85, which is well above consensus of $1.51 per share. This suggests that the company will continue to improve its profit margins, while maintaining its stance with respect to incentives.

The fact that Ford’s revenue still topped forecasts without the company ramping up marketing to move inventory is an important indicator when projecting out to the rest of the year and next year.

Wall Street expects Ford to achieve only minimal EPS growth, based on consensus estimates of $1.59 per share for fiscal 2018. This means F stock, which closed Tuesday at $11.27, is priced at just seven times fiscal 2017 and 2018 estimates. This compares to a forward P/E of 19 for the S&P 500 index.

The market is pricing in no optimism at all even though Ford’s is aggressively cutting costs and focusing on sales of more profitable vehicles to boost EPS growth.

Bottom Line for F Stock

Ford stock hasn’t delivered the returns investors would like, but to the extent Ford’s stance on higher margins continues for Q3 and for the full year, F stock should drive higher into 2018. Combined with strong divined yield of 5.35%, versus 2.00% yield for the S&P 500 index, F stock offers tons of value for relatively no risk.

As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/ford-motor-company-f-stock-offers-lot-long-term-value/.

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