After having a very strong rally between summer of 2012 and spring of 2013, Ford (NYSE:F) is somewhat stuck in a range and many investors are wondering why the company's share price isn't rallying any further despite all the successes it's been seeing all over the world recently. I've seen many comments on Seeking Alpha where investors of Ford were asking why the company isn't trading for values above $20 already as the stock price keeps bouncing up and down between high $16s and low $17s.
In fact, this is a very valid question. In the summer of 2012, Ford bottomed at $8.90 at around a time I was telling investors to back their trucks up to load up on shares. The rally afterwards lasted close to a year and Ford's price jumped to as high as $17.50 by July of this year. When the share price hit that level, many new bulls started to emerge and we saw many articles saying that Ford will be $40-50 by next year. Of course, this was followed by the company's shares being range-bounded for the next 4 months. Isn't that funny whenever a lot of bulls pile up on a stock, it stops rallying?
So, what's keeping Ford's value down at the moment? There are a few factors. First of all, Ford is in a cyclical industry and the market rarely assigns high valuation to cyclical industries. Very often, companies in cyclical companies get assigned P/E values ranging from 8 to 12 and this is just the way the market performs. While the growth of car sales in North America has been impressive in the last couple years, many people in the market seem to believe that we are nearing a peak at this particular market because the current run-rate of annual car sales is pretty close to the all-time high numbers.
Second, a lot of investors are worried about certain aspects of Ford cars. Recently, Consumer Reports released its list of most reliable cars and Ford's overall score was 63%, which was far below some of Ford's competitors such as Toyota (NYSE:TM) and GM. In fact, Ford was close to bottom in the list and this trend has been going on for a while. Here is the funny thing though: Ford was not rated low because of any mechanical problems. In the past, American cars would get hammered by consumer reports compared to Japanese and German cars due to mechanical problems but now the problems seem to stem from entertainment systems, which is an improvement. Ford was rated low mainly because of its infotainment system Sync which is a Microsoft (NASDAQ:MSFT) product. While the problem is not entirely Ford's fault, the company might want to ask its partner to provide a better quality product in order to keep its customers happy. Many people (including me) report connectivity and integration problems with Microsoft Sync and this is not good, considering Sync is one of Ford's biggest selling points (for my next car, I will probably get a Ford without the Sync system unless the Sync system gets improved significantly and there might be many Ford owners that may agree with me, especially given the company's rating with Consumer Reports). For the last several quarters, Consumer Reports has been mentioning the problems with Ford's Sync system and I am hoping that these problems will eventually get fixed. I like Microsoft as an investment (due to its low valuation and strong cash flow), but the company has been trailing far behind companies like Apple (NASDAQ:AAPL) in terms of quality and consumer satisfaction (when was the last time Microsoft launched a consumer product that didn't require many updates and patches to fix?). Hopefully Microsoft's next CEO will pay more attention to quality issues.
Third, a lot of Ford investors were hoping for a dividend increase since the company's cash flow has been pretty solid recently. While the company's management signaled that a dividend increase has been in plans (and will probably happen next year), it didn't happen soon enough for some investors. Currently Ford is investing a lot of capital in ramping up its capacity in China and the company is also spending a good amount in Europe for its restructuring program. Furthermore, Ford's pensions are also taking a lot of cash out of the company's pockets. In a year or two, these issues will be mostly solved and Ford will be able to return more money to its investors.
Fourth, many investors are worried about Alan Mulally's future at the company. While Mr. Mulally repeatedly said that he was happy at Ford and didn't think about going anywhere anytime soon, speculators continue to say that he will leave the company soon. If Mr. Mulally leaves Ford, this will lead to uncertainties at the company and this might shave some significant market value off the company. From the looks of it, the market is not completely convinced that Mr. Mulally will stay with Ford even though he assured us that he will. Until Microsoft gets its next CEO (given that it's not Mr. Mulally) many Ford investors will continue to be on the fence.
These are the main reasons Ford's stock price has been stuck in a range for the last few months. As the company continues to show strong results, investors will start buying shares of the company again but this might take a while. Currently, Ford's call options also have very little premium attached to them, which means that the option traders don't see much movement in Ford stock either (at least in the short term). For the time being, I would just hold onto my Ford stock and enjoy the dividends as they come. The company won't go anywhere anytime soon.
Disclosure: I am long F, MSFT. 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.