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Ford Stock: F Should Drive Toward $20 Despite Earnings Miss

Ford is undervalued, especially considering its generous yield

If at first you don’t succeed, try, try, try again.

Ford Stock: F Should Drive Toward $20 Despite Earnings MissThat seems to be the method of operation at automaker Ford Motor Company (NYSE:F), which just delivered first-quarter profit results Tuesday that declined 6.5% year-over-year, marking the company’s fifth consecutive quarter of declining profitability.

Ford was off fractionally on Tuesday in response, and it’s likely that the pressure on the Ford stock price since reaching a multiyear high of $18.12 is likely to continue.

Still, that’s no reason to give up on Ford stock.

As the nation’s second-largest auto maker by revenue, Ford has plenty of growth drivers ahead. And with Ford stock off about 13% from its highs, investors are looking at a great entry point for a dividend stock that should be in just about every portfolio right now.

Ford: Not Without Its Issues

Sure, that profits continue to decline is a concern. And I will grant that management might have reached a bit by predicting 2015 would be a “breakout year.” But the year is only a third of the way completed.

It’s important to understand the reasons for Ford’s recent struggles. Ford has been overhauling its factory as it tries to produce a new generation of its flagship F-150 pickup truck. Aside from being its best revenue-generating vehicle, the F-150 is also the most profitable. And the factory disruption that has lasted now for several months has obviously taken a toll on both revenue and profits. But things are about to change.

“The first quarter was a good start to a year in which our results will grow progressively stronger as the new products we have been launching start to pay off,” said Chief Executive Mark Fields in a statement.

It also didn’t help that Ford, a multinational company, had to deal with the strong U.S. dollar that devalues sales overseas.

Another perceived weakness — Ford’s flat revenues of $33.9 billion — is actually a bullish factor, from my vantage point. Revenue had declined by an average of 2% in the previous two quarters, so Ford stock investors should take that as a sign of improvement.

What’s more, on Tuesday’s conference call with analysts, Fields sounded even more optimistic about what lies ahead for his company, saying, “It’s very clear now that we’re (mostly) through the launch of the F-150, it’s clear we’re seeing higher revenues, likely a richer mix and lower costs, than we originally expected last year.”

All told, Ford doesn’t expect profits to stay in reverse for very long.

It’s also encouraging that Ford continues to grow share in important markets like Europe and China. This should help offset weaknesses in areas like Russia and South America.

In that vein, Fields added, “I think we’re going to be very well positioned for growth in Russia when the market stabilizes … and that’s going to be very good for our overall business in Europe.” In other words, icing it’s on the cake.

As senior executives work to get Ford in gear, smart investors would do well placing their bets on Ford stock.

Bottom Line

With Ford stock up just 2% on the year and trading at 19 times earnings, there’s plenty of value in these shares. Based on fiscal 2016 estimates of $1.87, which puts the forward P/E ratio at 8, Ford stock can climb above an $18 target — 15% higher — should that multiple expand by just two points.

That’s hardly out of the question, especially considering that for all its problems, it’s a suddenly aggressive dividend stock. While Ford only initiated its dividend back in 2012, as of its most recent quarterly payment of 15 cents per share, F stock already is throwing off a healthy 3.8% yield.

Assuming Ford can accelerate the pace of its factory overhaul to drive higher volumes for the F-150, the market would be more confident to assign an 11 multiple on 2016 estimates Ford stock, which puts the shares right around $20 in the next 12 to 18 months.

By then, Ford’s efforts would have more than paid off.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2015/04/ford-stock-still-driving-towards-18-way-20-despite-earnings-miss/.

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