Ford Motor Company (NYSE:F) surprised investors in its quarterly report, and the surprises went beyond the earnings numbers.
Though the company beat on earnings and blew away estimates on revenue, investor focus quickly switched to a key change in company strategy. The company will now direct most focus to its most profitable vehicle lines and impose additional cost cuts. Now, with a low valuation and the prospect for higher profits rearing its head, investors might want to take a deeper look at Ford stock.
The Earnings Beat was Not the Biggest News
Ford reported Q1 earnings per share (EPS) of 43 cents. This beat estimates on Ford earnings by 2 cents per share. It also comes in higher than the EPS of 39 cents reported in the same quarter last year. Revenues of $41.96 billion beat estimates by $4.8 billion. That also shows growth of 7.2% from year-ago levels. The stock price saw a modest rise in morning trading following this news.
However, other company news proved to be the most interesting part of this report.
Although an additional $11.5 billion in cost cuts gained interest, most attention focused on a key strategic pivot by Ford management. The company plans to allocate capital to the “high-performing parts of the business” and take it away from other segments. This means it will cease investments on its sedans such as the Taurus, Fiesta, Fusion and the C-Max. The new Ford will limit car investment to the Mustang and a remodeled Focus crossover. Most of its remaining investment will focus on trucks, vans, and SUVs, Ford’s most profitable vehicles.
I think the move for Ford to focus on its specialties is smart given its tough competitive environment. Its sedans have lagged foreign competitors for decades. Also, with strong demand and high profit margins on its trucks and SUVs, this decision could not make more sense.
Most of the Risks for Ford Have Been Mitigated
I described Ford in a previous article as a great buy for “risk-tolerant” investors. With the change in strategy, Ford is better mitigating these risks. Tariffs remain an unknown factor. The Donald Trump Administration could iron out an agreement at any time that reduces import duties. Also, even if the tariffs remain, Ford believes the duties will add $1.5 billion in costs, mostly in higher steel prices. Investors should note that the planned cuts will more than offset this increased cost.
I also think the $4.8 billion quarterly beat on revenue indicates the pessimism might have gone too far. At some point, pessimism makes some stocks too cheap to pass up.
I think that point has arrived with F stock. Unless a company appears to be headed toward bankruptcy, which I do not see in Ford’s case, a P/E ratio under 6 seems excessively low. Peers such as General Motors Company (NYSE:GM), Fiat Chrysler Automobiles NV (NYSE:FCAU), Toyota Motor Corp (ADR) (NYSE:TM) and Honda Motor Co Ltd (ADR) (NYSE:HMC) all trade at higher multiples.
Low P/E and High Dividend Bolster the Case for F Stock
Additionally, the forward P/E had been estimated at seven before the report, and the unexpectedly higher profit will push it down further. The valuation of Ford stock has remained below the teens for several years now. I do not expect that to change. However, assuming the company can maintain steady profitability, reaching a 12 PE is feasible and would double the current F stock price.
Moreover, the company dividend will pay investors well while they wait for the stock price to rise. Ford’s current dividend yield is almost 5.5%, despite dividend cuts. This year, the company dividend stands at 60 cents per share, down from 65 cents per share in 2017. However, as long as the company refrains from any excessive reductions, investors should profit handsomely. Also, if they can keep the dividend high, that should give current owners a reason to avoid selling the stock.
The Bottom Line on Ford Stock
The low valuation, a renewed focus and additional cost cuts should bolster Ford stock. Although the company announced higher-than-expected revenues and profits, it was the other news that earned the headlines. The refocus on profitable vehicles and additional cost cuts should bolster the profits of Ford stock.
Furthermore, with its dividend yield at almost 5.5%, owners of F stock will earn a high return while they wait for the stock price to rise. Though tariff risks remain, the cost cuts should mitigate the impact of most negative scenarios. Hence, investors wanting a cheap stock and a high dividend will likely be well-served by an investment in Ford stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
