"The worm has turned" ~ William Shakespeare
This phrase indicates a reversal of fortune has occurred. I believe this is the case for Ford (NYSE:F) at present. In the following sections, I will lay out my case as to why the worm has turned for Ford.
The Big Picture
Ford's strong financial performance has enabled the company to double the quarterly dividend in 2013 and 25% in the first quarter of 2014. Ford's stock has made a nice move to the upside recently breaking out above long-term resistance and fulfilled the coveted golden cross as well.
The stock is at a major inflection point right now. This is due to the fact market participants who were very bearish on the stock for most of last year, yet have begun to see the light, myself included. Nonetheless, not everyone is convinced. Many are taking a show me stance on the stock. Ford is taking a huge risk by launching the most new models in the company's history and investing billions in new auto manufacturing capability in support of the launch. In the following sections, we will drill down further on exactly what lies ahead for the global automotive behemoth.
Ford's ambition knows no bounds
Ford is embarking on one of the most ambitious product launched in the company's history. If all goes as planned, this should build a strong foundation for future growth and profitability.
Historic product launch
In 2014, Ford plans to launch the most vehicles worldwide in a single year in the company's history. Ford plans to launch 23 new vehicles worldwide in 2014.
Included in the launch will be all-new versions of two iconic Ford vehicles, the Mustang and F-150 truck.
Celebrating its 50th anniversary this year, Mustang will be available for the first time in key markets in Europe and Asia.
The all-new F-150 is part of Ford's best-selling F-Series lineup of trucks and sports the much anticipated new aluminum body.
Ford is expected to launch the revolutionary new aluminum-body F-150 pickup in the fourth quarter of 2014. The new F150 is expected to be at least 700 pounds lighter than its predecessor and get nearly 30 miles to the gallon. I see the truck taking the competition by storm.
Ford's largest manufacturing expansion in 50 years
To support these product launches, Ford has embarked on the company's largest manufacturing expansion in the last 50 years. Ford will increase capacity or add production in six of the company's U.S. assembly plants. Ford is also opening two new plants in Asia, one in South America, and one in Europe. The record number of new vehicles introduced in 2014 should support Ford's goal of increased global sales and market share.
Ford's global sales are picking up steam
Ford Momentum in China Continues with May Sales Up 32 Percent. Ford China May sales reached 93,323 wholesales, up 32%. Year-to-date sales reached 461,473 vehicles, up 39%. John Lawler, Chairman and Chief Executive Officer, Ford Motor China stated:
"Our sales are a direct reflection of our continued commitment to bring the best of Ford to China with a great lineup of Ford cars and utilities that offer high quality, great fuel efficiency, world-class safety and smart technologies. We are honored that customers are increasingly deciding that Ford vehicles are the best choice to power their lives."
First quarter sales for Ford China were up by 45% year-over-year with 271,321 vehicles sold compared to 186,596 during the same period last year. Ford is greatly increasing capacity in China to match this growing demand. The company is constructing four new plants in China to meet the increased demand.
Ford's European Sales were up 7.7% in first five months of 2014. Furthermore, the company garnered the highest commercial vehicle market share since 1998. Year-to-date market share was up 7.9%. May sales were down 1% largely explained by higher than usual CD car volume in May last year. More than 50% of Ford sales between January and May were all-new or significantly freshened vehicles as well. The new product surge was evident with the new Transit Courier and Tourneo Courier arriving at Ford dealerships across Europe. These are only 2 of 10 new Ford vehicles being launched in Europe in 2014.
Ford U.S. sales totaled 254,084 vehicles in May, up 3 percent from a year ago. Retail sales set several model records with 174,889 vehicles sold. This is an increase of 6% year-over-year. John Felice, Ford vice president, U.S. Marketing, Sales and Service stated:
"Fusion and Escape had their best months ever, which helped us to our strongest May result since May 2004. Explorer continued to gain ground in the midsize utility segment with its best monthly sales performance in nearly 10 years, while Lincoln MKZ saw its best May ever."
Ford has solid fundamentals and appears undervalued currently. With a substantial margin of safety in hand, the stock seems like a great buying opportunity at this level. Ford's management is focused on future growth. The continued success in China, Europe and the U.S. will be a significant factor in the company's success. The bottom line is Ford is making all the right moves to expedite future growth which bodes well for the stock.
Ford's fundamentals are healthy
Fortress balance sheet
Ford sports a 3% dividend yield. Moreover, after years of diligent work, the company has obtained a fortress balance sheet. Further, the company's debt is now investment grade.
The stock appears fundamentally undervalued
Ford's forward P/E ratio of 8.81 is among the lowest of any stock in the Auto and Truck Manufacturers industry.
Couple this fact with the stock's PEG ratio of 1.01 and you can make a solid case the stock is highly undervalued at present.
The stock technicals are flashing the buy sign
The stock broke through long-term resistance at the 200 and 50 day SMAs and fulfilled golden cross.
These are very positive developments from a technical perspective. I can tell you from years of personal experience, the fulfillment of the golden cross is a very good indicator a rally is underway. Moreover, the steady and stable upward trend in the stock since the beginning of the year is a telltale sign of accumulation.
I submit the worm has turned. The stock is on the precipice of a major run higher. Ford pays a dividend with a yield of 3% and has significant upside potential. Nevertheless, it would be remiss of me not to include the potential downside risks.
There are multiple downside risks for Ford going forward.
- A decline in industry sales volume, particularly in the United States or Europe, due to financial crisis, recession, geopolitical events, or other factors.
- A decline in Ford's market share or failure to achieve growth.
- Lower-than-anticipated market acceptance of Ford's new or existing products.
- A market shift away from sales of larger, more profitable vehicles beyond Ford's current planning assumption, particularly in the United States.
- An increase in or continued volatility of fuel prices, or reduced availability of fuel.
- Continued or increased price competition resulting from industry excess capacity, currency fluctuations, or other factors.
- Fluctuations in foreign currency exchange rates, commodity prices, and interest rates.
- Adverse effects resulting from economic, geopolitical, or other events.
- Vehicles financing terms have drawn criticism recently. Most new auto loans are based on 5 to 7 year payment terms now instead of the traditional 3 to 4 years. This could lead to people hanging on to their cars longer due to the fact they will be underwater until year 5.
Ford offers an excellent opportunity for capital appreciation due to the enormous product launch and manufacturing capacity expansion. The historic launch bodes well for increased revenues and wider margins in 2015 as ramp up costs begin to dissipate. Moreover, Ford is increasing capacity in China due to unbridled demand. Ford China recently crossed the 100,000 monthly sales mark for the first time ever. I am bullish on Ford for the long term. The risk-reward equation looks favorable presently. A substantial margin of safety and a 3% dividend yield tips the scales in favor of going long. Nevertheless, I suggest layering in to a position over time to reduce risk. The market is at all-time highs as we enter the summer doldrums.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.