Shares of Ford Motor Company (NYSE:F) have traded poorly over the past year, down about 14%. Although F stock is up about 0.5% over the past month and it has some positives, it’s still one to avoid.
Before talking about avoiding it, let’s talk about the good. Because truly, there are good things going on with Ford stock.
The F-150 has been the best-selling vehicle in the U.S. for more than four decades. Sales aren’t slowing, either. Unit sales of 820,799 in 2016 were the most F-150’s sold since 2005. So far, year-to-date F-150 sales are up 8.5% vs. 2016.
F Stock: Built Ford Tough?
In fact, from a sales perspective, the F-150 had its third-strongest month since 2010 in March. The only months to top March 2017 were December 2015 and December 2016.
The dividend is also very attractive. F stock pays out a 5.4% dividend — lofty by most investors’ standards. Its forward price-to-earnings ratio of 6.9 and trailing P/E ratio of 12 are also attractive.
Finally, management took a positive step, pushing former CEO Mark Fields out and bringing in Jim Hackett. Hackett was brought in in March 2016 as chairman of Ford Smart Mobility LLC. The unit’s job is “to accelerate the company’s plans to design, build, grow and invest in emerging mobility services.”
It’s great to bring in a forward-thinking executive to run the company and push Ford toward new technologies.
Negatives for Ford Stock
Unfortunately, while the F-150 continues to sell really well, Ford overall is not. Current vehicle sales of 1.026 million in the U.S. are down 4% year-over-year. And while you can make the case that these sales are still profitable for F — they are — a slowdown obviously isn’t something that excites investors.
This brings “peak auto” into the discussion, or the idea that car sales are hitting a top. I don’t think peak auto will be here until the economy falters and that has not happened yet. But sometimes the mindset can be enough to weigh on investors’ psyche and keep them out of the stocks.
As for valuation, F stock trades at just 12x earnings. But did you know this stock traded at just 6x earnings at the start of the year? A valuation gets higher in one of two ways: Either the stock climbs or the earnings fall. Can you guess which happened to Ford?
Profits are under pressure and that has hurt F stock. Analysts expect earnings to decline 12.5% this year, and climb 5% in 2018. However, 2018 earnings-per-share estimates of $1.62 are still below last year’s results of $1.76. It may take until 2019 for Ford to achieve 2016’s earnings results. Who knows how long it will take for F generate earnings of $1.93 per share like it did in 2015? And all of this is predicated on the economy staying strong.
Alternatives?
I still find General Motors Company (NYSE:GM) as a more attractive option. The yield of 4.4% is inferior to Ford’s, but GM is growing earnings, not seeing a contraction. Ford may also have superior sales growth, but in this industry, it’s all about the bottom line and GM’s is growing. Plus, a management team led by CEO Mary Barra is pulling the right levers to be successful.
Trading F Stock
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A big part of an investor’s success is reading sentiment. Right now, sentiment isn’t very strong for Ford. We don’t want to get super bearish right near the bottom, and honestly, we’re not. We’re just not bullish.
At least, until we see that this new management team can deliver. What if it has to cut guidance again, like it did for the first quarter?
On the charts, we see that the MACD (pink circle) shows positive momentum for F stock. The black line shows support near $10.70-ish. Meaning investors who want to be long can use a stop-loss near $10.50 or so to limit their loss potential. This level of support extends back several years.
So while it’s hard for me to not be bullish on a low valuation, high dividend, classic American stock sitting just off support, I can’t do it. I need to know that the business is improving and right now, it’s still unknown. Admittedly, GM’s business is a slow grower too. But if I had to buy an automaker, GM would be the one.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he did not hold a position in any of the aforementioned securities.
