All the macro conditions are in place for this to be an outstanding year for the auto industry. Interest rates are low. There is tons of pent-up demand for automobiles. The economy has been strong and sentiment is improving. Auto sales for the first quarter of this year were the best since 2007. Vehicle trade-ins are for much older cars than normal, indicating long absent buyers are returning to the car lots. High gas prices make the new fuel-efficient cars more attractive. Furthermore,
the stock market has been roaring. What's holding Ford (F) back?
That is a great question. The company has a great new line of cars and has been one of the main beneficiaries of the spike in auto sales. The company's January and February sales were up 11.2% over last year. March sales are expected to be strong as well. The main negative is a sagging European economy. However, strong growth in Asia, Eastern Europe, and South America should offset this weakness.
As far as Ford's stock, it looks like it is completely disconnected from this news, and reality, for that matter. Since the end of January, shares have been range bound between $12 and $13. Currently, the company's valuation is at 7.3 times forward earnings. This is extremely cheap given the current market conditions. Toyota (TM) and Honda (HMC) are trading for more reasonable 13.4 and 11.0 times forward earnings, respectively. Let Ford trade at the multiples of Toyota and Honda, and the share price nearly doubles. The only thing cheaper than Ford is General Motors (GM), at 5.6 times forward earnings.
The reason Ford doesn't trade for multiples like Toyota or Honda is rooted in the past. Major weaknesses at Ford were exposed during the Great Recession. The company was forced to face the looming issues that had been impairing the company's competitiveness. The most promising thing about this is the steps that Ford has taken to fix these looming issues. The company has dumped non-core brands like Aston Martin, Jaguar, Land Rover and Volvo. Ford has also scaled out its interest in Mazda. The purpose of selling these brands was to enhance the focus on the company's core brands: Ford and Lincoln. This was a solid move, as much of Ford's trouble was caused by the bureaucracy that develops when a company expands. The company will now have the flexibility to pursue global opportunities through the Ford and Lincoln brands.
It will be many years before the positive effects of the Great Recession will become clear, but without a doubt, Ford will benefit in the long run. The shock of the Great Recession was the wake-up call this company needed. Going forward, it can only get better. There has been good value at Ford throughout its history, however, that value has been hidden beneath the expansion of bureaucracy that accompanies success with U.S. auto companies. Once this bureaucracy is removed, as it has at Ford, the value will emerge. The playing field in the global auto industry is much more even than it was before the recession. Prior to the recession, hybrid technology was unique to Toyota. Now other carmakers are offering their own alternatives. The foreign exchange market has tipped in the favor of U.S. makers. A weaker dollar makes our exports more attractive while at the same time making imports less attractive. While the Japanese carmakers try to recover from the Japan earthquake, Ford may finally have its opportunity to expand market share. Ford currently has the right focus, which is the global developing market. Sales may be weak in Europe, but they are growing rapidly elsewhere. In these developing markets, it is reasonable to believe Ford will enter a more even playing field than in the past, due to Ford's revamped competitiveness.
While the huge volatility in the auto industry, partially caused by the Japan Earthquake and the Great Recession, makes it hard to compare the recent history of any of these companies with any reliability, there is one measure worth looking at. This measure is the strength of global automobile demand. Despite weakness in Europe, the world economy is growing, and with that growth comes demand for cars. Investors are being far too shortsighted to let Ford's recent struggles cloud the bigger picture. Thinking beyond the next 6 months to two years, it is inconceivable to think Ford will not be trading at a level of at least ten times forward earnings with earnings growth. This is the kind of investment value investors scour the market for. Keep an eye on Ford, because this lagging can only last for so long.
The simple target for Ford is a $2 earnings per share at 10 times earnings, to get to a $20 share price. Despite analyst estimates in the $1.5 ranges, the company earned $2 per share last year after removing the deferred tax assets. Understandably, analysts believe the resurgence of the Japanese carmakers and weak demand in Europe will harm Ford's growth, however, this is short sighted. The market conditions are optimal for a rebound in the cyclical auto market. While most auto companies are good picks, Ford is the most well positioned to capitalize on this resurgent auto market. The company has taken great steps to increase profitability at these lower levels of production. As the company grows to further maximize its scale, with its more competitive cost structure, the profits will expand significantly. Value investors should be thinking about buying Ford.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.