Ford Stock Is a Buy Despite Uncertainty on Multiple Fronts

Questions surround Ford (NYSE:F) on just about every level imaginable. In recent weeks, missing earnings and receiving a debt downgrade have hurt Ford stock. Moreover, uncertainty over economic growth, geopolitics, and consumer taste only make Ford more unpredictable.

Ford Stock Is a Buy Despite Uncertainty on Multiple Fronts
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However, given the struggles and the financials of Ford, the stock has likely priced in most of these factors. Hence, Ford should become a buy—for those that can handle the uncertainty in the type of returns they receive.

Uncertainty Has Worsened

Back in mid-July, I recommended that readers buy Ford, mostly for its high dividend and low price-to-earnings (PE) ratio. However, an earnings miss started F stock on a downward trend.

Just when the stock price had begun to recover, a debt downgrade by Moody’s started the downward trend again. Ford has fallen by about 10% since my call. It now trades near the $9.20 per share level.

This also comes at a time of change for the company. They have begun a $7 billion restructuring that reduces bureaucracy and focuses the company increasingly on electric vehicles (EVs), something seen mostly as a market for upper-income consumers who might choose a Tesla (NASDAQ:TSLA), Toyota (NYSE:TM), or some alternative product.

Still, the drop in Ford stock since the downgrade has amounted to less than 4%. To me, this signals that the equity has priced in most of the issues with the debt. Moreover, the downgrade should surprise few analysts.

Looking at the balance sheet, Ford holds over $156 billion in debt matched against only $36 billion in equity. That also does not account for about $80 billion in total pension obligations.

Furthermore, the lower price makes my previous thesis even more true in some respect. The forward PE ratio now stands at 6.6, and the dividend yield has risen to 6.5%.

What Might Ford Do?

When I look at the financials, I keep going back to James Brumley’s statement that “nobody has a clue what to make of Ford now.” Certainly, the situation leaves numerous questions on how Ford will grow. Does it move away from dividends? Or as Luke Lango theorizes, will increasing sales allow it to keep its payout?

External factors also come into play. How will the trade war affect the stock? What does economic stagnation in places such as Europe and South America affect the company? Not only do owners of F stock face uncertainty, but they also face it so many levels that they struggle to evaluate the stock.

The Case for Ford Stock

Where Ford will trade years from now remains anyone’s guess. So many factors will make that determination. Unfortunately for traders, many cannot forecast many of these determinants with a high level of accuracy.

However, I keep going back to two numbers, the 6.6 forward PE and the 6.5% dividend yield. Both numbers give growth investors a compelling incentive to buy Ford stock. Admittedly, the dividend yield may fall, perhaps even to 0%. For this reason, I would not recommend F stock to income-oriented investors. However, such a move improves its cash flows and would likely take the stock price significantly higher.

Conversely, if they maintain the dividend, Ford becomes a source of cash flow. I expect the PE to rise over time in this scenario too, but at a slower pace.

Moreover, over the last ten years, Ford stock has traded from just below $7 per share to just above $18 per share. The low came right after the financial crisis, so it would likely take a worst-case scenario to return to that price point. At the current price of about $9.20 per share, the $18 per share level, last seen in 2014, would nearly double investor returns.

Although we do not know whether to treat Ford as a growth or income play, chances are, it becomes at least one of those.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


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