Ford (NYSE:F) stock needs something to get its engine roaring again. The F stock price surged after the Great Recession. But in the past five years, shares have retreated back to levels seen just before the financial crisis. Rebounding from their 52-week low of $7.41 per share, Ford shares currently trade near $9.
So what’s in store for Ford? The company is in the middle of an $11 billion, multi-year restructuring plan. The restructuring not only includes layoffs, but a total metamorphosis of Ford’s business. Ford is phasing out sedans, focusing on more profitable trucks and SUVs. Ford is also reducing its presence in overseas markets, particularly Europe.
Most importantly, Ford is making a big bet on electrification. The company expects more than 50% of its vehicles sales will be electric by 2022.
But will this pay off? Can Ford improve its margins, sending the F stock price higher? Or will the much anticipated recession get in its way? Let’s take a closer look at Ford stock, and see why it’s too early to dive in.
New Focus for Ford Stock
Facing headwinds overseas, Ford is focusing on the North American market. Reducing European presence makes sense, given continued passenger vehicle sales declines. But Ford is retreating from emerging markets as well. The company is throwing in the towel on India, transferring its assets to a joint venture led by Mahindra & Mahindra (OTCMKTS:MAHMF).
Even with sales declines during the second quarter of 2019, the domestic market remains highly profitable. Ford’s North American earnings before interest and taxes was $1.7 billion for Q2 2019. Compare this to losses in South America ($205 million EBIT loss) and China ($155 million EBIT loss). The company’s European performance ($53 million EBIT) was an improvement, as the company’s pivot towards commercial fleets is paying off.
A nimbler, but more profitable Ford Motor Company is a win-win for shareholders. If the restructuring plan pays off, the F stock price could see material appreciation. But how much of this is priced into shares? Let’s take a look at F stock’s valuation, and see how it stacks up to global peers Fiat Chrysler (NYSE:FCAU), General Motors (NYSE:GM) and Toyota (NYSE:TM).
F stock currently trades at a forward price-to-earnings ratio of 10.7. The stock’s trailing enterprise value/EBITDA ratio is 14. Here are the valuation metrics for Ford’s peers:
- Fiat Chrysler: Forward P/E of 4.7, EV/EBITDA of 2
- General Motors: Forward P/E of 5.5, EV/EBITDA of 10.6
- Toyota: Forward P/E of 8.7, EV/EBITDA of 8.3
Based on these metrics, Ford stock appears overvalued to its peers. But there are a few factors to consider. Ford’s auto finance arm inflates the company’s outstanding debt. The fact that automakers typically have a finance arm tied to a capital goods business always makes valuation tough. But Fiat Chrysler, GM and Toyota have auto finance arms of their own.
Ford’s valuation may be inflated due to the continued high dividend. F stock current pays out a 6.6% yield. Fiat’s yield is 5.1%. GM pays a 4.1% dividend and Toyota’s dividend is 2.9%. But Ford’s continued ability to pay such a nice yield has been scrutinized. Earlier this month, InvestorPlace’s Mark Hake called into question Ford’s ability to maintain such a high payout. Ford has already cut out its annual special dividend. But the company may not be able to afford keeping the quarterly dividend at 15 cents per share. The high costs of restructuring will make things tight for Ford’s free cash flow. On top of this, there are pension contributions and other cash outlays (such as debt reduction) to consider.
If Ford cuts its dividend, shares would see a short-term drop in price. Income-oriented investors may feel comfortable owning a well-known stock that pays a high yield. But any threat to this status quo will lead to an investor exodus.
It Is Still Too Early for a Contrarian Bet
Successful auto industry investments are typically contrarian bets. The boom-and-bust nature of auto stocks makes them fantastic investments when things look bleak. But we have yet to enter another recession. The auto industry peaked several years back, but the car makers have yet to hemorrhage cash again.
The F stock price could see material downside in the short term. But one of Ford’s historical strengths is its ability to think ahead. While Chrysler and GM required a bailout, Ford quietly prepared for the Great Recession. I bet Ford will continue this resilience, as it chooses to adapt rather than die in a changing auto market.
Long term, the F stock price could appreciate back to early-2010s levels. But short term, shares could fall further. Wait for a worsening auto market to make a contrarian bet, but for now, wait on the sidelines.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.