Shares of major automaker Ford Motor Company (NYSE:F) fell 7.5% on September 29 after the conclusion of the company's annual Investor Day meeting. Management gave a long presentation, and in truth, had a lot of great things to say about its business. Unfortunately, it also had a few pieces of bad news to share, and that's clearly what investors took away from the event.
Ford shares sold off after the company reduced its full-year profit forecast, due to a significant recall and deteriorating conditions in a couple of its key markets. However, there seem to be more reasons to be bullish on Ford than there are to be bearish on the stock, especially for long-term investors.
The challenges currently facing Ford, namely the recall and a weakening climate in select regions, are likely temporary. Outside of that, Ford is killing it in other regions across the world such as China, the stock is cheap, and investors are treated to a solid dividend yield. That's why, although the headline news seems negative, Ford looks like a long-term winner.
Investor day news
Ford announced that its full-year profits would likely fall short of expectations. Management expects the company to generate $6 billion in pre-tax profit this year, down significantly from prior expectations of $7 billion-$8 billion. The problems stem from higher costs, mostly from a sizable recall in North America that will cost the company around $500 million. Ford also notes that conditions are weak in certain markets like South America and Russia, which will also weigh on profits.
Still, it's hard to envision Ford's problems as anything but short-term. The recall cost is a one-time event. Ford's recall problems aren't anything close to what General Motors (GM) is going through. GM booked $1.2 billion in recall-related costs last quarter alone. Because of this, GM reported just $0.11 per share in earnings last quarter, down 85% year-over-year. Separately, Ford's tough business conditions in Russia should improve with time as the level of geopolitical tension there eases.
This notion is supported by the fact that recently, data points in many of Ford's markets had shown improvement. For example, Ford reported that sales in Europe rose 14.4% in August, far ahead of the 2% industry growth rate.
In September, Ford reported that sales in China are up an amazing 30% year-to-date. Ford sold more than 717,000 vehicles there. Ford has impressively built its business in China over the past several years, which is obviously a great move since China is one of the premier emerging markets in the world. Last year, 45% of Ford's vehicles sold were in the Asia-Pacific region. This is almost double what it was in 2000. By 2020, Ford expects nearly half of its sales to come from Asia-Pacific.
Valuation and dividend look very appealing
With Ford trading down to below $15 per share, the stock is a bargain by most valuation metrics. Ford now trades for 9 times trailing earnings per share and just 7.7 times forward earnings estimates. This is far below the market multiple. The S&P 500 Index trades for a trailing multiple of roughly 18 times trailing earnings, which is double Ford's valuation. This seems irrational, because Ford is still highly profitable and offers a compelling dividend yield and share buybacks to increase shareholder value.
Ford also offers investors a nice dividend, thanks to the sell-off in its share price. Ford now yields 3.4%, which is a much higher yield than the broader stock market overall. Ford increased its dividend by 25% in 2014, so it's clear the company is committed to returning cash to shareholders.
Even though Ford forecasts a poor year, this could be a classic case of managing expectations. Given Ford's performance to start 2014, as well as its success in emerging markets, Ford could be setting itself up beat its lowered expectations. The takeaway for investors is that there are more reasons to be bullish on Ford and its future than there are reasons to be bearish. Ford is a solidly profitable company, with an attractive valuation and high dividend yield, and the stock is a great long-term buy thanks to its sell-off.
