Back in March, I initiated a position in Ford (F) when shares were trading just over $13. I considered Ford to be greatly undervalued and a strong buy at the time.
Ford closed last week at $16.76, more than 20% higher than when I purchased back in March, and more than 80% higher than 1 year ago. After seeing this type of recent price increase, one might ask: 'Am I too late?"
Ford was recently cut from Goldman's conviction buy list. I have to believe that the recent increase in share price was part of the reason for this considering Goldman's outlook for Ford increased from $17 to $20.
In determining whether Ford is still a solid buy or not, let's look at what I consider to be some positive and negative factors affecting the company.
1. Solid Product Lineup
- Small cars - Ford's Fiesta, Focus, and C-Max sold over 35,000 units in June. This was a 39% increase from last year and the best small car sales Ford has seen in over a decade.
- Ford Fusion - The Fusion is a contender for the car of the year and has posted record sales this year.
- Ford Escape - The Escape is the best selling utility vehicle in the U.S. this year.
- F Series Trucks - Best selling pickup for 36 years and sales from the first half of this year increased 22% from last year.
2. Technology - The future of the automobile industry is changing and it is changing toward cleaner and more efficient vehicles. Ford appears determined to come along for the ride.
- Ford's market share of the electric vehicle market grew to 16% in the first half of this year. That's a 12 point increase from a year ago.
- Ford is improving the fuel efficiency of its 2013 hybrid models.
- Ford is increasing its development in electric engineering by investing heavily in new engineering jobs and development centers.
- The 2014 F-150 Tremor is the first ever EcoBoost-powered sport truck.
- Ford recently became the first automaker to join the voluntary green house gas reporting program in India. It already participates in similar programs in other countries such as the United States and China.
3. Growth Potential
- US sales have already grown substantially for Ford. If and when Europe's market turns around, Ford appears primed to take advantage. Recently it experienced a 6.9% increase in sales in June, despite the fact that overall car sales were down.
- With the addition of possible growth in China in the coming years, exponential growth is definitely possible for Ford in the next 5 to 10 years.
4. Brand loyalty
- While plenty of people like to joke that Ford stands for 'Fix or Repair Daily,' the company has extremely loyal customers, with 50% of customers trading in their cars for another Ford vehicle.
- Ford customers are likely to hold onto their vehicles longer than most other car brands, averaging 6.4 years.
- BrandIndex recently ranked Ford #1 in brand perception with a score of 31. The next closest competitor was Honda with a score of 19.5.
- It wasn't long ago that Ford, along with the majority of the auto industry, was in trouble. The management team at Ford has done an excellent job of turning things around in a fairly short amount of time.
- The company has a gross profit of 21.67B, a P/E ratio of 11.5, and a ROE of 33%. Not bad for a company that 5 years ago many people believed would go bankrupt.
- Last year, Ford reinstated its dividend and this year doubled it from $0.05 quarterly to $0.10.
- Ford's payout ratio is at 17%, leaving plenty of room for the dividend to grow.
- The Ford family controls 40% of the board through their class B stock. It is believed by many that the family will push for continued dividend increases in the future. If this happens, Ford becomes a legitimate dividend growth stock.
1. Increased competition
- Tesla - still a niche company at the moment, selling a tiny fraction of the number of vehicles that Ford sales. If Musk gets the charging network that he has planned up and running and improves production capabilities, Tesla could soon start eating away at Ford's market share.
- GM - General Motors is also in a state of recovery. Personally, I feel it is still behind Ford in terms of a clear future, but GM remains one of Ford's strongest competitors for U.S. market share.
- As Ford updates the technology, design, and performance of its models, this leaves open a large possibility for recalls. Ford has already made several recalls this year, but nothing too drastic.
- Ford recalls over 12,000 cars and SUVs because of faulty child locks on rear doors.
- Ford recalls diesel version of EcoSport SUV in India.
- Ford recalls over 450,000 vehicles related to fuel leak concerns.
- A national consumer-protection law firm recently filed a proposed class action lawsuit against Ford claiming that the MyFord Touch systems are defective and often freeze.
- While Europe contains strong growth potential for the future, it's currently a disaster. The first six months of 2013 equaled the lowest car sales Europe has seen in 20 years.
- Ford plans to lose $2 billion this year in Europe.
- Ford has a plan in place for Europe, but depending on how the economy and market does, the question is will the planned cuts be enough?
So while Ford has increased 84% from this time last year compared to 25% for the overall market, I still consider Ford to be fairly valued and a solid buy. With revenue per share at $35.79 and double digit quarterly revenue growth year-over-year, there is still plenty of upside for Ford's stock price.
Ford seems to be leading the pack in the U.S. as it gains market share with solid sales growth and new innovative designs and technologies. As long as the company can limit its overseas losses in the near term and ensure that new technologies don't cause a surge in costly recalls/lawsuits, I see no reason for anything but continued success for this company. I fully expect to see Ford above $20 (considering the overall market doesn't tank) by year's end and would not be surprised to see another increase or even doubling of its annual dividend next year.