Why Ford Shares Are Poised To Gain Over 50%

| About: Ford Motor (F)

Ford Motor Company (NYSE:F) shares have been trending lower as investor concerns over the debt crisis and economy in Europe takes a toll on the markets. In the best case scenario, companies like Ford might only experience a decline in sales from a number of European countries. But the worst case scenario would be if the European debt crisis continues to deepen and spread to more countries and ultimately create another global financial crisis. While the macro-issues have been driving the stock down, the company continues to make progress.

Fitch Ratings recently raised Ford's credit rating to investment grade, a level it had not seen for about 6 years. This is another significant achievement that marks the advances made by the company, with CEO Alan Mullaly at the helm. Not only does this confirm the positive trend for the company, it also is likely to allow it to borrow at lower interest rates in the future. Borrowing expenses can be huge for a major manufacturer like Ford, so this bodes well for the financial results going forward. A Bloomberg article sums up the progress at Ford:

The upgrade of Ford's ratings reflects the automaker's significantly improved financial performance, balance sheet repair, and product portfolio improvement that have taken place over the past several years," Fitch said in the statement. "Since the last recession, Ford's management has been heavily focused on increasing profitability, growing liquidity, lowering debt and reducing the company's pension obligations.

Other credit rating firms could be next to raise their rating for Ford. The improvement in credit ratings is not the only major positive for Ford this year, the company also recently agreed to pay a dividend to shareholders. In early 2012, Ford initiated an annual dividend of 20 cents per share, which provides a yield of about 1.8%. Since earnings estimates are significantly higher, there is a strong chance that Ford is positioned to increase the dividend in the future.

Automakers could see weakness from Europe in the coming quarters, however car sales in the United States have been strong. Ford appears to be well-positioned and I prefer it over General Motors (NYSE:GM) because it did not take government bailout funds and therefore does not have a large government ownership stake in it. Ford also has less exposure to the slowing economy in Europe when compared to GM. According to a recent article, GM has lost about $15.6 billion in Europe since 1999, and that trend could continue.

Ford appears undervalued and it trades for just about 6.6 times forward earnings. Just weeks ago, analysts at Standpoint Research upgraded Ford shares from hold to a buy. The company set a $17 price target which implies upside of more than 50% from current levels. At $17 per share, the stock would still be reasonably valued at around 10 times 2013 earnings.

Here are some key points for F:

  • Current share price: $11.46

  • The 52 week range is $9.05 to $16.18

  • Earnings estimates for 2012: $1.46 per share

  • Earnings estimates for 2013: $1.72 per share

  • Annual dividend: 20 cents per share which yields 1.8%

General Motors, Inc. shares have also been weak. However, I think this stock has less rebound potential since it received bailout funds from the U.S. government, and the government owns a significant stake. Also, GM has more exposure to Europe, which has historically been a challenge for the company. Finally, Ford pays a dividend and GM does not.

Here are some key points for GM:

  • Current share price: $23.16

  • The 52 week range is $19.00 to $33.47

  • Earnings estimates for 2012: $3.66 per share

  • Earnings estimates for 2013: $4.64 per share

  • Annual dividend: None

Disclosure: I am long F.

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