Ford Motor Company (NYSE:F) finds itself caught in another downtrend. A lackluster crop of new vehicles along with the specter of aluminum and steel tariffs have placed pressure on the Detroit-based automaker.
Ford stock has suffered under those threats, falling about 20% since January. However, with a low PE and a high dividend, now might be the time for speculators to take a position in F stock — if they can stomach the risk.
Competition and Tariffs Weigh on Ford Stock
In a previous article, I called Ford a “great choice for conservative investors.” The stock rose for the rest of the year on that sentiment. However, F stock has struggled in 2018. The release of the new Ford Ranger at the Detroit Auto Show in January underwhelmed investors.
Ford replaced CEO Mark Fields with Jim Hackett last May. Fields grew non-core product lines and the bottom line, but the core business fell behind in his tenure. To be sure, vehicle redesigns take an average of three years. Still, Mr. Hackett has yet to orchestrate the needed competitive turnaround.
Also, Ford stock fell further on the announcement of pending steel and aluminum tariffs. Since car companies use both materials heavily, this will increase the cost of making new cars. This negative news has caused the stock to lose about 20% of its value since mid-January.
Where tariffs raise the most concern is in the risk of retaliation. Ford, as well as peers such as General Motors Company (NYSE:GM), Toyota Motor Corp (ADR) (NYSE:TM), Honda Motor Co Ltd (ADR) (NYSE:HMC) and Volkswagen AG (ADR) (OTCMKTS:VLKAY, OTCMKTS:VLKPY), depend heavily on China, the world’s largest auto market.
China’s change in leadership structure, which gives President Xi Jinping a “president for life” status, also increases uncertainty levels.
On a year-over-year basis, sales in China fell 18% in January and 30% in February. Analysts believe competition from peers based both inside and outside of China is to blame. China retaliating against the tariffs could put further pressure on sales.
Compelling Valuation and Dividends
Given the negatives and uncertainty, I no longer recommend Ford stock for risk-averse investors. However, the stock price appears to reflect most of these negatives.
The stock pays a dividend of 60 cents per share. While that dividend has fallen over the last couple of years, it still represents a 5.6% yield. Also, even with profit margins expected to decline in 2018, Ford stock trades at a very low seven times forward earnings.
The consensus for annual earnings stands at $1.55 per share in 2018 and $1.48 in 2019. While profits may fall, analysts expect the company to remain profitable and to be able to pay its dividend out of profits. The most pessimistic estimate for 2019 earnings remains at $1.06 per share, which takes the price-to-earnings (PE) ratio to about 10.
I do not expect Ford to rise to the S&P 500 average PE of 26 or produce the type of gains seen in Tesla Inc (NASDAQ:TSLA). However, even a low-PE stock should not trade at seven times forward earnings. Moreover, investors will collect a high dividend while they wait for a recovery.
Bottom Line on Ford Stock
The fall in Ford stock, a low PE, and a high dividend make the equity a buy for some investors. The stock has suffered from threats on both the competitive and political fronts.
Whether a change in leadership is addressing the lackluster product line remains to be seen. However, China, which will be hit by American tariffs, appears to have become a virtual dictatorship. How the Chinese government will react to the tariffs remains unclear.
If F stock falls below $9 per share for any length of time, I’d take the 15-20% loss from these levels and sell. However, if Ford catches up to its competitors, investors may look back at this price level and be glad they bought.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.