Volatility in the stock market has reached levels not seen since the 2008 financial crisis. And widely held, out-of-favor stocks are faring even worse than the broader indices. For example Ford Motor (NYSE:F) stock is down by 50% year-to-date.
By comparison, the S&P 500 is down 25% in that same time frame. Investors in F stock started the year with high hopes, but wishing for the stock to hold the $9-range was asking for too much.
At current levels, Ford stock is more compelling than ever. And although the company suspended its dividend to preserve cash, that is a prudent thing to do. Only near-term risks will hold it back. After all, countries all around the world are shutting down to prevent further spread of the coronavirus from China.
Buying a new car is the last thing anyone is thinking about.
Positive Catalysts Are Ahead for F Stock
President Donald Trump just signed a piece of legislation that will provide $1 billion to fight the coronavirus outbreak. One aspect of the bill gives infected employees 14 paid sick days. It also provides monetary support toward free testing.
By enabling testing for uninsured Americans, the government is taking an important step in stemming the spread of the virus. Indirectly, growing confidence in the country’s ability to minimize the spread will calm the stock market.
In the interim, investors who expect an eventual return to normalcy can start accumulating automotive stocks like F stock.
Ford is starting to show an improvement in sales compared to its peers. Its sales even fell by less than Honda Motor (NYSE:HMC). General Motors (NYSE:GM) posted a sharper decline in sales quarter-over-quarter compared to Ford.
Analysts are generally neutral on F stock — as half rate the stock a hold. Still, the average price target is $8.70.
Ford’s Mustang Mach-E
Ford’s display of the Mach-E electric vehicle SUV in London signals a change in the company’s European strategy. Led by Mach-E, Ford said it will have a whopping 18 electric models by the end of next year.
And, the majority of customers pre-ordering the Mach-E are choosing the extended-range version. The company will support the broader uptake of the EV by installing 1,000 new charging stations across the continent.
So, if Ford sells 50,000 models in the first year at $52,000 (the price of the extended-range version), it will bring in a decent $260 million in revenue.
Valuation and Risks on F Stock
Generous compensation packages, like this $2.5 million in F stock for COO Jim Farley, is one of the reasons for not investing in the company. Spending more shareholder funds on securing executive leadership and less on quality control only damages the long-term viability of the company.
For example, bungling the 2019 launch of the Explorer is unacceptable. It also spent $1 billion in modernizing the Chicago Assembly Plant.
Value investors may still give management the benefit of the doubt. One may forecast revenue growth by at least 4% over the next decade in a discounted cash flow revenue exit model. In the scenario, F stock is worth $10 a share.
Conversely, Stock Rover figures Ford has a fair value of $6.61. This estimate is based on the company’s expected future cash flow. But simplywall.st is very bullish as it estimates F stock is worth $12.72. The price target is justified if Ford’s management achieves annual earnings growth of 53.9%.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, Chris owns Ford shares.
