Cheap Ford Gets Key Upgrade

| About: Ford Motor (F)

Summary

Ford has been a poor performer recently as last week's earnings report disappointed.

However, the earnings report was not as bad as it first appeared and the shares picked up a key analyst upgrade today.

The stock is cheap, pays a solid dividend and has several catalysts that should move the shares higher in the second half of the year.

I first purchased Ford (NYSE:F) in January 2013 when the shares were trading near $11 a share. I bought the stock as the company was in the midst of a turnaround and the shares seemed significantly undervalued at those levels.

When I first bought the equity it belonged in my "value" portfolio. Since then the company has been a source of dividend growth and with a yield of over 3% now, it squarely belongs in my "income" portfolio as I expect the company to continue to raise their payouts at a good clip.

The stock performed very well in 2013 but has been a laggard so far in 2014. I believe this will change in the second half of the year and have recently raised my stake in this domestic automaker in front of what I expect to be strong performance for the rest of 2014. I base my outlook on several factors.

A Misunderstood Earnings Report:

Ford shares have been under pressure since reporting earnings of 25 cents a share, ~6 cents a share below consensus estimates last week. It should be pointed out that quarterly revenues beat expectations by more than $1.8B.

More importantly, the report and miss were driven by some "kitchen sink" type "clear the decks" activity in front of a new CEO that will take the helm by the end of the year. Ford added $400M in warranty reserves for older vehicles in North America. The company also booked $100M in additional costs for higher freight and other items due to the severe winter weather and other expenses of $400M that are mainly due to Venezuela's currency devaluation. Without these charges, the company would have easily beat earnings expectations.

Key Markets Growing:

Ford has reached production levels of ~100,000 vehicles a month in China through joint ventures and sales are up over 40% over last year's levels so far in 2014. The company plans to introduce five different Lincoln models in China by 2016. Before dismissing the possible success of this brand in the Middle Kingdom, investors should realize that General Motors (NYSE:GM) sells some 100,000 Buicks a month in China where the brand has more cachet than in the United States.

The long horrid winter in the United States is over and sales are improving as pent up demand gets exercised. Kelly Blue Book estimates domestic auto sales will be up 10% in April over March. Ford should do well in the second half of the year as it launches the new F-150 trucks and other important models. Ford also saw sales rise 12% year-over-year in Europe in March as the eurozone continues to stage a slow recovery.

Key Analyst Upgrade:

The stock picked up a key fan today as Craig-Hallum, which moved its rating from "Hold" to "Buy" while moving its price target from $16 a share to $21. I take most analyst reports with a grain of salt. I am encouraged that the firm's analyst, Steve Dyer, is a four star ranked analyst at TipRanks based on the accuracy of his previous calls compared to other analysts.

Mr. Dyer believes the stock has 30% upside and his upgrade on the company is "based on the recovery in Europe taking hold, accelerating prospects in Asia Pacific and the 2015 F-series launch which is right around the corner in North America."

Valuation:

The stock pays a dividend yield of 3.2%. Earnings will be down this year mainly due to launch expenses and flat revenues. However, as critical new launches globally sales should rebound 5% to 7% in FY2015 and earnings should shoot up substantially. The stock goes for less than 9x the current consensus earnings estimates for FY2015, which is too cheap given the stock's yield and the company's growth prospects. BUY.

Disclosure: I am long F. 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.