Ford (NYSE:F) reported its U.S. sales were up 13.4% in June. The news was well-received by the market, as the stock climbed 2.8% on the day of the report. And why not; it was the best June for Ford since 2006. But, given the recent increase in interest rates and the rising cost of auto loans, are Ford's sales threatened moving forward? If rates were to continue rising, the answer would be yes, but I see rates settling here. Furthermore, given its valuation, which I believe does not accurately reflect the stock's value to a special adjustment I make to growth, I see 29% upside to my 12-month target of $22.
Ford's June Sales Growth
Type of Vehicle
June Yr/Yr Change
You can see in the table above that the rate of improvement was better for June versus year-to-date, which implies business picked up through the month. Other economic data, including May Wholesale Trade data, certainly shows recent strength in auto sales generally.
Some might say that the reason for the pickup (no pun intended) was the recent sharp rise in interest rates. It's counterintuitive, but like with housing, those people on the fence or planning to buy a car or a house in the near term would be catalyzed into action by the rising cost of capital to finance such a purchase. They would be afraid to miss out on current rates. In the past, I've noted my view that this should only be a temporary driver of activity, especially if rates continued to rise. In that case, the cost of financing might push the purchase out of the realm of affordability for a critical number of buyers.
The good news has not been limited to Ford and GM (NYSE:GM); rather, it's an industry wide phenomenon. AutoNation (NYSE:AN), America's largest automotive retailer, also just reported strong June sales results. The company saw a 10% increase year-to-year in June auto sales, and domestic car sales increased by 15%, which is obviously good news for Ford. However, what we are interested in is the retailer's same-store sales. Those will give us an idea of what is really happening in America and for Ford. The same-store sales figure will weed out any growth that came from the company's store expansion. AutoNation's same-store sales increased by 5%, which is a fantastic pace, reflecting solid demand for autos in the U.S. But with interest rates on the rise, can this last?
As for Interest Rates
The good news for investors is that over the past couple weeks, long rates have settled in. This might be a factor in the renewed confidence we have seen in stocks over that span as well. The SPDR S&P 500 (NYSEARCA:SPY) and the SPDR Dow Jones Industrial Average (NYSEARCA:DIA) are up 6.7% and 5.4%, respectively, through July 12 since touching down on June 24th.
Ben Bernanke settled market concerns with his speech Wednesday evening. Further, the comments of many Fed representatives since the Chairman's now infamous "tapering" statements in June have helped to moderate interest rates. Therefore, with that significant risk mitigated, I think it's safe to say Ford can keep rising.
The stock's valuation is not expensive in my view, with the P/E at 12X the analysts' consensus EPS estimate of $1.42 for 2013. That compares well with the analysts' five-year growth outlook for the stock of 11.9%. Obviously, the PEG ratio is near 1.0 when applying those figures, and they do not account for the dividend yield, which is currently 2.3%.
The stock looks even more attractive when looking at the more meaningful next 12 months. Averaging the analysts' estimates for 2013 and 2014 gives us an EPS estimate for that period of $1.55. The stock trades at 11X that figure, giving it a PEG ratio of 0.9. And if we add the 2.3% dividend yield to the denominator (let's call this the Kaminis Yield Adjustment©™), I would give Ford a relative PEG of 0.77X. Thus, if the stock were to get to a relative PEG of 1.0 including the Kaminis Yield Adjustment, giving it a deserved P/E value of 14.2, it could rise as much as 29% to my target of $22. This same logic would argue that the stock is today already worth $19.54 or 14% more than it cost on Friday. I get to this figure by multiplying the deserved P/E ratio of 14.2 times the EPS of the last twelve months of $1.42 (averaging $1.41 and $1.42 based on Yahoo Finance data). Therefore, and given the interest rate risk consideration, I rate Ford a strong buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.