If Ford Motor Company (F) couldn’t use tremendous demand for new vehicles to print higher share prices, what hope does Ford stock have now that auto market looks to have peaked?
No doubt the performance of Ford stock has been deeply frustrating for investors, and they may have no choice but to wait a while longer. Even after a prolonged period of substantial sales growth — led by higher-margin offerings like SUVs — Ford stock has been languishing for years.
F stock is off more than 7% for the year to date — a market laggard once again. Look at the last one-, three-, and five-year timeframes and you’ll see that Ford stock has been a flop. It seems that no matter what the carmaker does, investors just won’t pony up very much for the promise of future earnings.
Sure, it’s right to discount shares in automobile manufactures for things like cyclicality and interest rate risk. High capital requirements and low margins make it easy for these companies to fall apart when the macro winds turns against them.
And yet Ford still trades at a bargain valuation despite a steady stream of good — if not unblemished — news.
Ford Stock Gets No Respect
Ford sales rose 8% last month to 254,711 vehicles, its best showing since 2006. Importantly, sales of higher margin SUVs and trucks get credit for the performance. SUVs enjoyed a 13% increase in year-over-year March sales.
But, wait, that’s not all. The slowdown in China is crushing the economic outlook across industries and the world. Not so much for Ford. March sales in China climbed 5% year-over-year to 114,788 vehicles. For the first quarter, Ford saw a 14% sales gain in the world’s largest car market.
On the downside, the market is concerned that demand for new vehicles may have peaked. On a seasonally adjusted annual rate, U.S. light-vehicle sales dropped to a 13-month low of 16.56 million in March. And then you always have to be mindful of what incentives and fleet sales are doing to margins.
If it couldn’t get a little margin-expansion love from the market when the car-sales cycle was on its way up, it’s tough to see how the price-to-earnings ratio is going to expand now that the market is starting to worry about demand.
This doesn’t mean there’s no value to be had for patient investors. F stock currently changes hands at just 6.5 times forward earnings, yet it has a long-term growth forecast of 11% per annum. By comparison, the S&P 500 has a more expensive forward P/E of 17.4 on a projected growth rate of less than 6% a year.
At the same time, Ford’s forward PE offers a 25% discount to its own five-year average, according to Thomson Reuters Stock Reports.
Like anything else, it can take a long time for valuation to return to the mean, but the way Ford stock is priced these days, it’s a good bet that it will be a market-beater eventually.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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