In this article, we’re focusing on Ford’s P/E ratio.
Ford’s trailing P/E ratio is behind one-year highs, and its forward P/E ratio compares favorably to the wider index and to sector peer, GM.
We feel the market will not allow the status quo, and that Ford’s share price could move higher.
Ford's P/E Ratio
As you can see from the chart below, Ford's (NYSE:F) trailing P/E ratio has ranged between a low of around 8.3 and a high of just over 12.5 during the last year. Currently, it trades at a P/E ratio of 11.1 and has been increasing at a steady pace over the last few months. From this chart, we can see that Ford's trailing P/E still has scope to go higher, since it is 11% below its year high, and we can also see that Ford's trailing P/E has been gaining strength in recent months through a steady upwards movement, which shows that it has momentum that could continue going forward. A key reason for this is that upward movements in Ford's P/E ratio in recent months have lacked volatility -- they have been stable -- and we feel that this shows a shift in market sentiment that could be replicated over the short to medium term.
F PE Ratio (NYSE:(TTM) data by YCharts
Indeed, Ford's forward P/E is higher than that of sector peer, General Motors (NYSE:GM). Its forward P/E of 13.4 is 8.1% higher than that of its rival, which indicates that market sentiment for Ford is stronger than for GM. This is shown in the chart below.
F PE Ratio (Forward) data by YCharts
The fact that Ford has a higher forward P/E ratio than GM should not concern investors, since historically there has been a premium attached to Ford's valuation versus GM, as the chart below highlights.
F PE Ratio (Forward) data by YCharts
As you can see, over the last three years, Ford's forward P/E ratio has almost always been higher than that of GM. This backs up our view that the market favors Ford over GM in terms of being willing to bid up its shares to higher levels (and higher forward P/E ratios). Furthermore, we feel that there is scope for Ford's premium versus GM to be extended, since the largest premium of the last three years occurred in early 2012 when Ford's forward P/E was around 8.9 and GM's forward P/E was just below 7. At this time, Ford's forward P/E was, therefore, at a premium of 29% to GM's forward P/E, while at present the premium is just 8.1%. This shows that there is scope for the gap between the two forward P/E ratios to widen going forward.
In addition, Ford's forward P/E ratio compares favorably to the S&P 500's forward P/E. That's because, while Ford trades at a forward P/E of just 13.4, the S&P 500's forward P/E is much higher at 16.5. This means that the wider index is trading at a premium of 23.1% to Ford, which we feel provides further evidence that Ford's forward P/E (and share price) could continue its upward momentum of the last few months.
What Does This Mean For Investors?
We believe that Ford could be undervalued at current levels and, as such, there could be an alpha opportunity. This is because of Ford's trailing P/E ratio currently being at a discount to its one-year high. In addition, we're encouraged by the fact that recent momentum has been moving steadily upwards -- we feel this could continue going forward.
Furthermore, Ford's forward P/E compares favorably to both sector peer, GM, and to the wider index. Indeed, Ford's premium versus GM is some way off its widest point over the last three years, which shows that there is scope for Ford's forward P/E to increase going forward. Meanwhile, Ford's forward P/E ratio is substantially below that of the S&P 500, which highlights the good value that may be on offer at Ford. We feel that investors could bid up Ford shares to narrow this gap somewhat.
Ford's current P/E levels appear to offer an alpha opportunity for investors in terms of being long Ford shares. We feel that the market will not allow Ford's trailing P/E to remain behind its one-year highs, given the improved sentiment that the stock has recently enjoyed. We also believe that the current premium versus GM is too narrow and the discount versus the S&P 500 is too wide. As such, we think that Ford could deliver gains going forward because of a realization among investors that Ford offers good value at current levels. Therefore, due to what we feel is a mispricing, investors could bid up the price of Ford shares to push their price higher. As such, we feel there is an alpha opportunity long in Ford stock.
Feedback request: What do you think of Ford? Would you buy, sell or hold right now? Please comment below!
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.