Shares of Ford Motor Company (NYSE:F) struggled Wednesday and closed down about 65 basis points, likely thanks to a new recall. While admittedly not a huge drop, it is a bit deflating after shares were up about 1% near the open. It’s also disappointing because Ford stock is only up 2% this month.
Why’s Ford’s stock price disappointing despite its 2% monthly gain? General Motors Company (NYSE:GM) is up an impressive 12% this month, and that’s after falling over the last few sessions. Over a three-month period, it’s even worse, with Ford stock up about 4% to GM’s 24%.
What’s going on?
First, the Recall
Let’s touch on the recall. Some 1.3 million Ford F-150 trucks are affected by this door latch recall. It will cost roughly $267 million, but not impact management’s prior full-year earnings guidance of $1.65 per share to $1.85 per share.
On the surface, the recall costs would represent about 13% of net income from the prior quarter. In all, with deductibles and such, this will likely run about 5 cents per share. So is this much ado about nothing? $267 million is no drop in the bucket, but it surely isn’t the end of the world for Ford stock. So no, F stock price will not plunge as a result.
Ford vs. GM
In the past, I have been adamant that GM is better than Ford stock. GM shares have been soaring, while Ford stock has been stalling. Why the disparity? Both have low valuations and high dividend yields.
On a trailing basis, Ford’s price-to-earnings (P/E) ratio hasn’t been as attractive. Its P/E went from trading in the mid-single digits to over 12. There are only two ways to increase the ratio: Either a higher “P” or a lower “E.” Certainly of the two choices, the latter is the worse.
That’s Ford’s case though, with 2016 earnings of $1.72 per share falling almost 11% from the $1.93 it earned in 2015. Last quarter, I felt the automaker did a lot to boost sentiment on Wall Street when management raised its full-year forecast. Analysts now expect earnings of $1.75 per share, about flat with last year’s result. Analysts currently expect a 13% drop to $1.52 in earnings for 2018, though.
On GM’s end, management guided for earnings of $6.00 to $6.50. More than halfway there now, analysts still expect less than the $6.25 midpoint, forecasting earnings of just $6.14. They expect a slight decline in earnings for 2018.
Other than the fact that GM grew its 2016 earnings from 2015 unlike Ford (keeping GM’s valuation lower than F stock despite GM stock rising over the last few months) and the earnings falloff from 2017 to 2018 is expected to be less, the differences are tough to spot.
But There Are Some Differences
First, GM is buying back a lot of stock. This year, GM figures it will return about $7 billion to investors. Last quarter, the ratio was about 3:1 in terms of buybacks and dividends. GM bought back $1.5 billion worth of stock and paid out $0.6 billion in dividends.
That comes out to about $6 billion in buybacks this year, significant for a now $60 billion company. Even after this crazy rally, GM still trades at just 7 times earnings. Why not buy back stock? Plus, it helps show earnings growth, although the quality of that growth can be debated.
Ford didn’t do a buyback.
Another knock on Ford is that some feel it’s lagging other automakers. Barclays analyst Brian Johnson upped his price target on GM to $55, arguing it’s vastly undervalued compared to its industrial peers. It’s making big strides in electric vehicles (with 20 planned by 2023) and in autonomous driving. Ford? Not so much, he says. It lags in North American margins and is behind GM and Tesla Inc (NASDAQ:TSLA) in “its positioning for the megatrends and disruptive mobility,” Johnson reasons.
I can’t prove or deny his claims. But if that’s the consensus among others on Wall Street, it could help explain why GM is doing so much better than Ford.
GM Over Ford Stock?
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Not so fast. While it’s still cheap and yields almost 3.5%, GM’s been on a heck of a run. I still like GM more than Ford, but I would wait for a pullback or some consolidation before getting long.
Current Ford stock investors can enjoy the dividend though, with the F stock dividend yielding close to 5%.
That said, Ford’s chart is a total mess. No matter the timeframe, I’m having trouble spotting anything consistent. True support sits at $10.50, while a breakout over $12.50 should be bought. If the latter happens, it could mark the start of a catch-up trade in F stock price. On the positive side, Ford stock is now over $11.50, also a noteworthy level.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
