I’ve been a staunch supporter of Ford for quite some time, arguing — on several occasions — the merits of its turnaround capabilities.
Plus, giving Ford the benefit of the doubt and expecting F stock to drive higher made sense, especially given its strong yield of 5.68%, versus a 2% yield for the S&P 500 Index. Ford stock closed Monday at $10.57, near its 52-week low of $10.47.
From a valuation perspective, the company’s forward price-earnings ratio of 6.7, versus a forward P/E of 19 for the S&P 500, assumes that it won’t deliver any earnings worth discussing.
Consensus estimates of $1.75 per share for this fiscal year and $1.54 per share next year can easily be met, if not exceeded. The company’s top- and bottom-line beat in its fiscal second quarter was a recent example.
But since then F stock, which is down 11% year to date, has done nothing but drive in reverse, falling almost 7% this month.
Saying the Right Things Only Goes So Far
There’s no doubt that Ford’s earnings beat was encouraging, especially with the prospect that new CEO Jim Hackett fully recognizes what needs to be fixed at the Detroit-based automaker.
But patience is now running out. Although Hackett — at the company’s City of Tomorrow event in San Francisco — touted Ford’s future of mobility and self-driving technology, do we investors realistically expect Ford to go the distance against tech behemoths, such as Alphabet Inc (NASDAQ:GOOG , NASDAQ:GOOGL), Uber and the aforementioned Tesla? And to say nothing about Apple Inc.’s (NASDAQ:AAPL) own self-driving car ambitions.
“When you paint the robots as perfect and humans as imperfect, we’ve made a big mistake,” Hackett told the San Francisco Chronicle in an interview. “If you think about a vehicle that can drive anywhere, anytime, in any circumstance, cold, rain — that’s longer than 2021. And every manufacturer will tell you that.”
Ford bulls, as I once did, will argue that the company is making moves to turn things around. Hackett’s arrival and the company’s push into mobility/technology is a step in the right direction. And I agree. But at this point, Ford must first surpass its own Detroit rival in General Motors Company (NYSE:GM), which has a considerable lead with vehicles such as the Chevy Volt.
And when it comes to bankrolling these type of tech projects, Ford will struggle to compete with the aforementioned tech giants that have much deeper pockets.
Where’s the Value in F Stock?
Beyond the appeal of the cheap price, where’s the value in Ford? What’s going to drive the stock price higher?
Take, for instance, the second quarter during which revenue of $39.85 billion beat Street estimates of $37.1 billion. But as the revenue grew, Ford’s auto segment operating margin took a step back, contracting 180 basis points year-over-year from 7.7% to 5.9%. The decline led to 17% fall in non-GAAP EBIT, which fell $2.5 billion from $3.0 billion last year.
The weak auto segment operating margin, combined with an auto sales landscape that is not a robust as it used to be, makes it tough to be optimistic about an industry that is notorious for its extremely low margins. In the case of Ford, this explains why its forward P/E of 6.7 is so discounted. Assuming the company does earn $1.75 per share for this fiscal year, earnings are projected to decline more than 10% in fiscal 2018.
In other words, with profit margins declining at a time when auto sales have likely peaked, those margins will likely erode faster when auto sales begin to fall. The industry has become saturated. Most consumers who are willing and are able to buy a new car have likely already done so over the past year or two. This is the what the market has realized. F stock, despite its strong yield, is cheap for reason.
Bottom Line for F Stock
F stockholders have tons of reasons for frustration, particularly from the standpoint of Ford’s cheap price, which seems to only go lower.
While Ford is aggressively cutting costs and focusing on sales of more profitable vehicles to boost EPS growth, the market is pricing in no optimism at all and expects Ford to achieve only minimal EPS growth.
And over the past several years, the market has been right. And I’ve run out of patience with this stock.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
