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Ford Stock Still Is a Buy, but It Will Take Some Patience

Ford stock - Ford Stock Still Is a Buy, but It Will Take Some Patience

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I turned bullish on Ford (NYSE:F) stock last year, and so far that’s seemed premature at best. F stock has continued to struggle. In fact, amid the market-wide sell-off in December, the Ford stock price hit a nine-year low.

The weakness makes some sense. Long-running concerns about “peak auto” combined with fears of an imminent recession. With everyone from General Motors (NYSE:GM) to Tesla (NASDAQ:TSLA) to Alphabet (NASDAQ:GOOGL,GOOG) seemingly ahead in autonomous driving, the bear case here is simple. Ford earnings have peaked and thus deserves its single-digit multiple to earnings.

But I still think there’s a case that Ford can get through. The exit from passenger cars should help margins and free up capital. It’s been proven beyond a shadow of a doubt that Ford can’t compete with Toyota (NYSE:TM) and Honda (NYSE:HMC) in sedans. Focusing on more profitable SUVs and trucks (where Ford is a leader) seems a common-sense business decision.

So far, however, the move has done little for Ford stock. And even if the strategy works, it’s going to take some time. It seems clear at this point that investors don’t have patience. And with a potentially ugly 2019 ahead, it might take quite a while for the stock price to bounce back.

Ford Stock Struggles

It’s been a long, consistent decline for the Ford stock price, which has dropped by about 50% from mid-2014 highs. But it’s difficult to pinpoint a precise reason for the selling pressure.

Earnings, for instance, have been reasonably in-line with expectations, with more beats than misses on a quarterly basis. And those earnings have grown over time. In 2014, the company generated $1.16 in adjusted EPS. That figure rose to $1.78 last year, before declining to an estimated $1.33 this year.

Fundamentally, the news doesn’t look that bad. But there is a core issue here: Ford really hasn’t given investors a compelling reason to buy F stock. It’s the biggest car manufacturer in the U.S. but has struggled overseas.

Fiat Chrysler (NYSE:FCAU) executed an impressive turnaround. GM has made progress in electrics. Overseas manufacturers like Honda and Toyota have remained consistent.

Ford, however, simply hasn’t been compelling. Beyond an attractive dividend yield, which now clears 7%, F stock has been a tough stock to buy.

The Case for Ford

The plan to end passenger car production seems an effort to fix that problem. Ford is close to dominant in pickup trucks, particularly the F-150. SUVs are showing continued strength, with the high-end Lincoln Navigator a notable bright spot this year.

Indeed, investors initially bought into the plan. Ford gained on the news and a few weeks later touched a six-month high at $12. Since then, however, the stock price has dropped about 30%.

That does seem like too steep a decline. Higher oil prices could have had an impact in the early going, as increased gas prices would shift consumer demand to the smaller cars Ford no longer would manufacture. But as oil and gasoline prices have pulled back, Ford hasn’t benefited.

Meanwhile, sales are down year to date, with December unit sales down almost 9%. But the pressure has been in passenger cars. SUV units are up 0.5% this year, and Ford has sold 1.4% more trucks. Combined with pricing benefits, the results this year seem to support the strategy, as I wrote back in October.

Again, not much has changed over the past few months, except for the Ford stock price. And for those investors like myself who see autonomous driving optimism as overblown, that would seem to create an opportunity.

Can the Ford Stock Price Finally Rise?

But F stock keeps fading, even considering the recent 13% bounce. And so it’s worth wondering if investors need to run into F stock just yet.

After all, 2019 and even 2020 unit sales are going to show sharp declines. So will revenues. The impact on earnings isn’t clear: analysts are widely split on 2019 EPS, with the high estimate of $1.70 more than double the low projection of $0.83.

What we’ve seen in the second half of 2018 is that investors are treating Ford stock as a “show me” story. And the problem for a near-term perspective is that Ford isn’t going to have firm result to show for at least for a few more quarters.

Investors can be paid to wait with the 7%+ dividend. But they might also want to tread carefully, and perhaps hope that there’s another sell-off in Ford stock that can provide an even better opportunity.

As of this writing, Vince Martin has no positions in any securities mentioned.

Article printed from InvestorPlace Media, https://investorplace.com/2019/01/ford-stock-patience/.

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