By Parke Shall
We have been writing about Ford (NYSE:F) for the better part of the last two years. For the most part, we have been bullish on the company, stating numerous times that we believe it to be a great multiyear buy and hold investment. For the most part, we will admit that we have been on the wrong side of this trade. But it is not a trade for us, it is a chance to add a long-term holding to our portfolio and allow it to sit and reinvest over the course of numerous quarters.
F data by YCharts
Today we wanted to review some recent performance results, talk about ways to continue to hedge against a financing bubble in auto, and most importantly talk about a key metric that a lot of analysts do not seem to be paying attention to.
First, let's review the company's performance in March. March was a disappointing month for both of the domestic US automakers as tough comps from the year prior have been making it more difficult for the company to post impressive year over year results. Here is a wrap up of March data, courtesy of Seeking Alpha,
March U.S. auto sales rose 3% Y/Y but a disappointing adjusted annual rate of 16.57M vehicles came in well below analyst expectations and the 17.5M clip the industry enjoyed in February.
The sales report "plays into the idea that with 2015 being a record year, maybe we're set up to start peaking a little bit in terms of consumer demand," Bloomberg's Kevin Tynan says.
However, historically-low gasoline prices and interest rates continue to lure consumers to dealer showrooms, setting the stage for car sales this year to remain near 2015's record 17.5M, says Barclays analyst Brian Johnson, who adds that some automakers will need to "cough up incentives to keep it there."
For months, we have been saying that the Ford F series needs to continue to be the backbone to the company's sales, especially in the United States. Sales of the company's F-150 pickup truck, made from aluminum, have helped drive the company's resurgence after the financial crisis. We have stated on numerous occasions that we need F-series sales to continue in a robust fashion, alongside other good domestic selling vehicles, like the companies Mustang. Despite poor sales numbers in March, we have continued to see the F series lead the way for Ford in the United States. From Seeking Alpha,
Ford (F -2.7%) records its best performance ever in the U.S. during March as F-Series demand stayed strong. F-Series volume topped 70K vs. the 48K for the line of Chevrolet Silverado pickups.
Sales growth by brand: Ford +7.8% to 245,022; Lincoln +11% to 9,689 units.
Sales growth by model: Ford Fiesta -8% to 4,549; Ford Fusion +2% to 29,675; Ford C-MAX -4% to 1,702; Ford Mustang -1% to 12,563; Ford F-Series +9% to 73,884; Ford Explorer +4% to 21,605; Ford Transit +53% to 14,895; Ford Edge +49% to 14,005; Lincoln MKX +88% to 2,771; Lincoln MKC -6% to 1,956; Lincoln Utilities +28% to 6,428.
Leading up to the company's record your last year, and even throughout 2015, there were peaks and valleys in the company's performance. There were several months where it looked as though growth was slowing or European auto registrations slowed down, and we encouraged investors to continue to look at the big picture and take a larger view of the results for the year. We think we are simply seeing another one of these valleys with this March data and that Ford sales will continue to hold strong moving forward.
Of course credit quality has likely deteriorated as we have moved further and further from the financial crisis and as the short-term debt cycle has a tendency to turn over every 6 to 8 years. But whether or not there is reason to be concerned is the real question. Here's how companies like Credit Acceptance (NASDAQ:CACC) have fared in that time. CACC "provides automobile dealers financing programs, and related products and services."
CACC data by YCharts
In a few past articles, we have recommended having a small short position on in CACC, only if you were nervous about the quality of the credit that automakers are distributing. CACC is the vehicle through which many of these domestic automakers distribute their credit and we think it would make for a good hedge for those still looking to collect Ford's dividend and perhaps protect against a broad market pullback or a specific credit event in automobiles.
This brings us to our final point, which is a large key metric that many people have missed. The average vehicle age in the US is at all time highs.
Despite the fact that credit worthiness of customers has likely moved lower and despite the fact that the Ford has had a record your last year, the average age of the vehicle on the road is at the highest it has ever been. The average age of vehicles on the road is now over 11 years. This speaks obviously to the quality of the vehicles that are being produced of late, but it also means that there may still be some fresh demand for new automobiles as we move forward. We think that this factor could be the single most important ignored metric in the automobile space right now.
Our warning signs to owning Ford would be whether or not the company has trouble stringing together several good months in a row, or whether or not some of the financing market in autos starts to teeter on the brink. We are keeping a close eye on both of these items in between companies reporting earnings, but at this point we still do not see much reason to be concerned.
Ford continues to pay and attractive dividend that we are happy to reinvest as we move forward. As you can see, valuation on an earnings basis is as low as it was heading into 2010.
F PE Ratio (Forward) data by YCharts
Furthermore, the company issued a special dividend last year as a way to add knowledge to shareholders that they believe the equity is mispriced and that they are committed to deploying capital to shareholders. We like that move for management, and that is the type of stock we want to own.
Let's take a look at the valuation. As was commented on by another Seeking Alpha article out last week, Ford's valuation is the same as what it was back in 2009. This is pricing the company for some type of imminent collapse, whether it be from a lag in sales or financing trouble. We just don't believe that the compressed valuation matches the amount of risk that's involved with owning the company here, and as such we think the Company remains a good long-term buy.
Disclosure: I am/we are 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.