Strong May auto sales by Ford Motor Company (NYSE:F) didn’t have the booming effect on Ford stock that investors hoped it would.
Against an industry-wide sales drop, the Detroit-based automaker reported a 2.2% gain in U.S. sales, topping rival General Motors Company (NYSE:GM) but still not impressing investors.
What’s more, Ford’s May U.S. sales data also beat competitors Honda Motor Co Ltd (ADR) (NYSE:HMC) and Toyota Motor Corp (ADR) (NYSE:TM). Indeed, Ford still faces some serious challenges, particularly when it comes to how it’s perceived on the market when compared to Tesla Inc (NASDAQ:TSLA) and the future of autonomous and electric vehicles.
The company seems to recognize this and it’s likely a large part of the elevation of new CEO Jim Hackett.
Here’s Why F Stock Belongs in Your Lot
Hackett’s promotion and the company’s new-found focus on mobility technology is a step in the right direction. As such, I believe Ford stock — currently at around $11 — can reach $13 by the end of the year, delivering almost 20% returns.
What’s more, Ford, unlike some of its competitors, is focusing on profitability and not market share. That’s a wise move, given that the auto industry is notorious for delivering weak profit margins.
Digging deeper into May’s auto sales data shows Ford’s incentives were down to $500 and $300, respectively, for its best-selling F-Series pickups and on Ford-brand car models. That Ford’s May sales still beat General Motors, Honda and Toyota — even without the company ramping up marketing to move their inventory — is an important indicator when projecting out to the next 18 months.
Wall Street expects Ford to achieve only minimal EPS growth, based on consensus estimates of $1.54 per share this year and $1.62 per share next year. This means Ford stock, which closed Friday at $11.04, is priced at just 7.2 times fiscal 2017 and 2018 estimates. This compares to a forward P/E of 19.9 for the S&P 500 index.
The market is pricing in no optimism at all even though Ford is aggressively cutting costs and focusing on sales of more profitable vehicles to boost EPS growth.
Ford Benefits From Weak Oil
Another thing the market overlooks is the impact sustained weak oil prices can have on Ford’s profit margins.
Oil prices are down almost 20% since hitting a 2017 closing high of $57.01 in January. Lingering concerns about global oil supplies caused oil prices to fall to their 2017 lows Tuesday, with WTI Crude closing at $45.96. And it doesn’t appear as OPEC’s industry improvement plans, including talks of production cuts, will immediately change the course.
Why is this important?
When looking at the first five months of the year, U.S. demand for heavyweight vehicles such as trucks and SUVs — where Ford enjoys higher profit margins — went up. Analysts believe the reason for such strong demand has to do with weak crude oil prices. Recent data suggests continued weakness in crude oil prices, so consumer demand for heavyweight vehicles should remain intact.
This is good news for Ford.
High demand for models such as its F-Series pickup will improve Ford’s profitability. Assuming Ford maintains its preference for higher margins over market share into Q3 and the balance of the year, F should drive higher into 2018.
Combined with generous 5.4% dividend yield versus 2% for the S&P 500 index, F offers a truckload of value for relatively little risk.
Bottom Line for Ford Stock
To be sure, the auto sales landscape is not as robust as it used to be, given that sales remained relatively flat in May compared to a year ago. But amid the recent drumbeat about “peak auto,” Ford is making moves to turn things around.
And from my vantage point, F — having bounced 8% higher since falling last month to a 52-week low of $10.67 — showing signs of a bottom, now’s the time to own Ford stock and wait for the company to deliver on its new higher-margin focused initiatives.
Collecting the strong yield is icing on the cake.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
