Why Ford's Recent Pullback Is A Buying Opportunity

Aug. 5.14 | About: Ford Motor (F)

Summary

Ford has pulled back recently after accelerating to 52-week highs, but more upside cannot be ruled out.

Ford's European business is bouncing back, while its performance in the emerging markets can lead to further improvements.

Ford is on track to launch a record number of vehicles this year, which should lead to solid long-term growth.

Ford's valuation is attractive, and the company is expected to outperform the automotive market going forward.

After a weak performance in the first quarter, Ford (NYSE:F) surprised Wall Street with terrific second-quarter results. The automaker's results were driven by strong performances in North America and Asia, with net income rising 6% from last year despite a 1% drop in revenue. In addition, its European business bounced back, reporting a profit for the first time in three years. In fact, a strong performance in Europe more than offset Ford's poor performance in Latin America.

Ford also outperformed its rival General Motors (NYSE:GM), which is facing headwinds on account of several recalls and a federal investigation. Ford shares are up 10% so far this year, but the stock has pulled back from its 52-week high recently. The pullback can be attributed to lower-than-expected auto sales in the month of July as reported by most car makers, but Ford was among those who had a strong month.

Even then, the company should be able to continue outperforming going forward. Let's see why.

Better times ahead

Ford is committed to product excellence and innovation. It has lined up various new products for launch in the coming months. In fact, according to Mark Fields, President and CEO of Ford, "This year is the most aggressive in our history for new product launches." The company plans to launch 23 new products this fiscal globally. Some of these new launches include the 2015 Edge, the Focus ST, Ford Everest, and many more.

Ford has also partnered with various other firms in different geographical locations to expand its market. For example, in China, it opened a new transmission plant in a joint venture with Changan. Along with its expansion plans, Ford is also determined to deliver value to shareholders. The company plans to buyback around 116 million shares, which will offset the dilutive effect of potential convertible debt conversions and stock-based compensation by up to 3%.

Some concerns

The company is facing various challenges in Latin America, as Brazil is bearing the pinch of inflation and a weak economy. Along with this, the situation remains uncertain in Argentina and Venezuela as well. As I had mentioned in my previous article:

"However, South America still remains a concern for the automaker as it had incurred heavy losses. The devaluation of currency in Venezuela has also added to Ford's troubles. The Brazilian economy is slowing down due to the high interest rates imposed to control inflation. According to management:

The quarter was impacted adversely by several significant factors that are not representative of the underlying run rate of our business."

Looking beyond short-term challenges

However, from a near-term perspective, Ford may face some challenges in the second half of the year due to expenses related to new vehicle launches. The company will have to bear heavy costs as it launches a record number of vehicles this year. Some of the vehicles, such as the F-150 full-size pickup truck, are undergoing an extensive redesign, which will put pressure on its balance sheet in the second half.

However, these investments will deliver long-term gains, as Ford is trying to deliver a superior product to customers. Ford is focusing on fuel efficiency. According to a recent report:

"Ford revealed the weight, power and towing capacity of the radical new aluminum-bodied F-150 pickup today.

The company exceeded its initial promise to reduce the truck's weight by 700 pounds compared to the current steel-bodied pickup. A well-equipped four-wheel-drive 2015 crew cab weighed 4,942 pounds, a whopping 732 pounds less than a comparable 2014.

The lighter weight should reduce fuel consumption for the new version of America's best-selling vehicle. The 2015 F-150 goes on sale in the fourth quarter. Ford will announce its price and EPA fuel economy ratings later."

Ford has equipped the new F-150 with military-grade aluminum, along with a powerful engine line-up. Hence, the company is trying its best to win over more customers with highly-efficient vehicles. As such, investors shouldn't be concerned with short-term worries, and instead focus on the long run as Ford can deliver stronger growth on the back of new products.

Diversification helps

Ford is doing well in other geographical areas. The company is pleased with its European business, which has turned profitable after three years, driven by the economic recovery in the European market. In Asia Pacific, Ford is positive about its prospects with China's economic growth expected to be in the 7.5% range. Similarly, the Indian economy is also expected to get back on track after the recent general elections and a new government to lead the way. Overall, global economic growth is expected to continue throughout the year, leading to higher global automotive industry volume.

Better than GM

Ford has also outperformed its peer GM, which is undergoing a tough time. GM's net income fell drastically to $190 million from $1.2 billion last year in the recently reported quarter. It also bore the costs related to recalls to replace a defective ignition switch, which led to the death of 13 people. This has put extra pressure on the number one U.S automaker, as it had to pay around $400 million as compensation to the victims, while its image has suffered as well. All these factors will provide an edge to Ford going forward, and the introduction of new vehicles will increase excitement among customers.

Fundamentals

Currently, Ford has a trailing P/E of 10.5, which is in line with the industry P/E of 10.9. Moreover, its forward P/E of 8.71 looks more attractive, reflecting earnings growth. Moreover, Ford is cheaper than rival GM, which trades at around 18 times last year's earnings. In the long run, Ford's earnings are expected to grow at an annual rate of 12.23%, better than the yearly erosion of 6.31% seen in the last five years. Also, Ford's expected growth rate is way better than the industry average which suggests that the automobile industry's earnings will decline at 2.67% a year for the next five years.

Finally, Ford has a strong dividend yield of 3%. Its European business is bouncing back, which again is a good sign. Although there might be near-term pressure due to costs associated with new product launches, the long-term looks promising. As such, Ford is still a good bet at 52-week highs.

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.