Ford Motor Company (NYSE:F) is a frustrating stock for shareholders. The company reported solid fourth-quarter earnings and revenue that beat consensus estimates by a wide margin. If fundamentals are so good and the stock pays a healthy dividend — a yield of 5.66% (before the special dividend) — investors are scratching their heads over why Ford stock is close to 52-week lows.
Ford earned 39 cents a share on respectable revenue of $41.3 billion. But the results failed to get markets excited and, more importantly, shake off the bearish sentiment regarding the company’s prospects.
Ford’s management decisions could explain some of the uncertainties in the company’s growth prospects. The company built a world-class race car, the Ford GT, but production numbers are so low that it will not add to the bottom line.
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The Ford Ranger would have done well just like the Ford F-150, but Ford is choosing an underpowered engine. Instead of having a competitive edge over General Motors Company’s (NYSE:GM) Chevy Colorado, Honda Motor Company, Ltd.’s (NYSE:HMC) Ridgeline Truck and Toyota Motor Corporation’s (NYSE:TM) Tacoma, Ford is fitting the Ranger with a four-cylinder 2.3 L Ecoboost.
Ford could have done better by fitting a 3.5L V6 or a 2.7L Ecoboost in the Ranger. In the next six months, Ford executives expect competition in the truck market. Still, Ford is adjusting well to the competitive marketplace. Its transaction price is going up, helped by the availability and demand for the Navigator and the Expedition.
Markets may fret over Ford’s lack of confidence in generating higher profit margin in the quarters ahead. It is coming off a very high profit margin quarter in the North American market. The markets outside of the U.S. are not filling in the gap, though.
On Feb. 9, Ford said that sales in China fell 18% from last year, to 76,000 vehicles. Ford also blamed Brexit and high commodity prices for reporting weak sales in Europe. It lost $206 million in total in the Asian, South America, and EMEA markets.
Despite the mixed results, Ford made $2.3 billion in operating cash flow, up $800 million from last year. The company ended the quarter with a strong balance sheet. Cash and marketable securities totaled $26.5 billion.
Ford forecast flat revenue growth, which is the primary source of investor angst. This flat number is despite the company launching 23 global products, up from 11 in 2017. Adjusted earnings per share will come in the range of $1.45 to $1.70. Foreign exchange and commodity prices are a continued headwind for Ford stock. Ford hedged one-third of its commodity exposure for the year. Product recalls are another source of negative pressure on Ford stock.
Reshaping the Company
Selling 6% fewer vehicles in China is due to heavier competition. But if a new wave of product launches resonates with customers, this number could reverse. Electrification of its vehicles is another long-term objective for the company. It plans to spend $11 billion in EVs (electric vehicles) by the year 2022 and will have 40 hybrid vehicles in its product line-up. This budget was announced at the Detroit Auto Show and is a boost from the original $4.5 billion by 2020.
Of the 22 analysts covering F stock, the average price target is $12.20. But assuming Ford’s dividend is stable and the company does figure out how to grow at between 2% and 5% annually, then Ford stock is worth at least $11.20 a share.
Bottom Line on Ford Stock
Ford stock is deeply out of favor and will continue to trade in the single-digit P/E and forward P/E range until sentiment changes.
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Investors will turn upbeat on the company if management demonstrates it can run its business profitably in markets outside of the U.S. And if sales of the Ranger is an unexpected success, that could give Ford stock a lift, too.
As of this writing, Chris Lau was long F.
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