Ford Shares Are Too Cheap -- Barrons.comFont size: A | A | A
12:08 AM ET 4/15/17 | Dow Jones
By Andrew Bary
The flip side to investor infatuation with Tesla (ticker: TSLA) is the distaste for Ford Motor (F) and General Motors (GM).
Ford shares, at $11.11, are just above a 52-week low, after falling 15% in the past year. Despite some negatives, including a recent earnings warning for the first quarter, the stock looks inexpensive.
Ford trades for just seven times projected 2017 earnings of $1.58 a share and yields 5.4%. The dividend looks secure, given a comfortable payout ratio under 40% -- the regular annual dividend of 60 cents a share divided by the 2017 earnings estimate. The average payout ratio for the Standard & Poor's 500 is above 40%.
Ford has the fifth-lowest price/earnings ratio in the S&P 500. The absolute lowest belongs to rival General Motors, which at $34, trades for under six times projected 2017 earnings. Barron's has written favorably on GM, including in an article earlier this year (" GM Shares Could Drive 35% Higher," Feb. 18), when GM traded around $37.
Ford's recent weakness reflects several concerns, including whether the strength in the North American vehicle market -- Ford's biggest profit center -- will persist, and whether the company's financing arm, Ford Credit, will be hurt by exposure to subprime auto loans and declining used-car prices.
Ford surprised Wall Street in late March, when it guided to weak first-quarter earnings of 30 cents to 35 cents a share, below the consensus of 47 cents and the year-earlier 68 cents. The company held firm to 2017 guidance of about $9 billion of operating profits, but there's skepticism about that. The 2017 guidance would translate into an earnings decline; in 2016, Ford's adjusted earnings were $1.76 a share.
Management recently has sought to reassure investors about the credit issues. In a note, JPMorgan analyst Ryan Brinkman described client events with Ford CEO Mark Fields and Ford Credit Chief Financial Officer Marion Harris. He wrote that Ford management said that "there is no subprime bubble, that the health of the auto finance market is strong and captive finance companies very strong, and that Ford Credit is ahead of the curve (not behind) in accounting for the impact of lower residual prices, and has remained disciplined, relative to the quality of loans and extent of leasing."
Brinkman is bullish on Ford, citing its strategy of focusing on the Ford brand, its strength in pickup trucks, and a "still modest valuation." He carries an Overweight rating and $15 price target -- 35% above the current quote.
Ford sits on a great balance sheet. Its automotive operations hold $27.5 billion in cash, and net cash after debt of $11.6 billion, or nearly $3 a share. But Ford has sizable unfunded pension and retiree health-care liabilities. In his analysis, Brinkman calculated that Ford effectively is valued at a rock-bottom 2.8 times projected 2017 earnings before interest, taxes, depreciation, and amortization. The S&P 500 is valued at around 10 times 2017 Ebitda. His $15 price target implies a value of just 3.5 times estimated 2018 Ebitda.
Ford's market value of $44 billion trails Tesla's $50 billion, despite Ford's $6 billion of projected net income this year, versus an expected loss at Tesla.
Ford could attract an activist like Greenlight Capital's David Einhorn, who is urging GM to create two classes of stock to boost its depressed shares. Einhorn doesn't appear to be getting much traction with his proposal. An activist could argue that Ford should be buying back stock -- it now repurchases a minimal amount. Ford, however, is more insulated than GM from activist pressure because the Ford family holds supervoting stock, giving it 40% of the votes.
Even with the family control and auto credit issues, Ford looks cheap and possesses one of the most secure high dividend yields in the S&P 500.
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April 15, 2017 00:08 ET (04:08 GMT)
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