Reasons To Be Optimistic For Ford

| About: Ford Motor (F)


Ford saw a 2.6% decrease in U.S. auto sales in January 2016 compared to January 2015, which came in mixed among competitors.

The Mustang and F-Series posted sluggish results compared to the Chevrolet Camaro and Silverado. Despite weak sales, Ford outpaced the industry average in average transaction price growth.

Ford faces challenges in 2016, but given the strength of the automotive industry and the weak valuation, I am optimistic on Ford's 2016.

Ford (NYSE:F) announced January 2016 U.S. vehicle sales of 174K, down 2.6% from the same month in 2015. This decrease came in slightly above the 5% decrease estimate from Kelley Blue Book and certainly signals a slow start for the American automaker. Additionally, the F-Series saw a concerning 5% year-over-year drop in January 2016. However, despite the slower volume, the company posted average transaction price growth almost three times the rate of the overall industry.

With many auto companies blaming the east coast snow storm for lackluster sales, Ford's 2.6% decrease came in mixed among competitors with an overall industry average that was 0.4% lower. This comes on the heels of a record 2015 that saw 17.47 million vehicles sold, surpassing the 2000 mark of 17.41 million. Competitors such as Fiat Chrysler (FCAU) (up 7%), Nissan (OTCPK:NSANY) (up 2%), Hyundai (OTCPK:HYMPY) (up 1%) and General Motors (NYSE:GM) (up 1%) beat Ford's January, while others such as Honda (HMC) (fell 2%), Toyota (TM) (fell 5%), and VW (OTCPK:VLKAY) (fell 7%), lagged behind. Furthermore, in the critical pickup truck market, Ford's F-Series lagged behind the Chevrolet Silverado and Ram pickup truck during the month.

With the F-Series being Ford's most important model, this is concerning for Ford's long-term view. The model is coming off a busy 2015 where it underwent a drastic model change to an aluminum body starting with this year's model, has seen tight inventory levels so far as the company has worked to configure their manufacturing plants. Because of the inventory constraints surrounding the new F-150 model, the company did not utilize heavy incentives to sell older models like competitors in the first half of 2015. However, the company reached full production in the second half of 2015 and was credited for the company's late surge in 2015. Showing its resiliency, even with the supply issues, the model was awarded the title of America's best-selling pickup for 39 straight years and the best-selling vehicle for 34 straight years with over 780,000 trucks sold in 2015.

Another concerning figure from January's sales report was the sluggish 2016 start for the Ford Mustang. Despite reclaiming the title of U.S. muscle car of the year in 2015 by selling over 122,000 mustangs compared to only 77,500 Chevrolet Camaros. In January 2016, the Mustang saw a 13% decrease compared to an 11% increase by the Camaro. In previous months, I have credited Ford with recreating the magic with the Mustang and continuing dominating the pickup truck market with the F-series. While I understand it is only the first month in 2016, Ford must be leaders in both of these markets to have a successful year and another slow start, similar to 2015, is not an option.

This slow start to 2016 in addition to other possible threats such as the overall health of the U.S. economy, the upcoming interest rate hike, and emergence of new competitors in the auto industry are weighing heavily on investor sentiment. If there was an event or condition that forced the U.S. economy back into slowing growth territory or a global recession, it would definitely have a major impact on Ford. Furthermore, with an interest rate hike announced in December, it will likely force the automotive market to reach its limit. Additionally, with new companies working to produce technology infused vehicles such as Tesla (NASDAQ:TSLA), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Apple (NASDAQ:AAPL), it is important that Ford stays ahead of this curve and doesn't fall behind when it comes to technology use in the vehicle. Ford appears to be prepared for this through rumored partnerships with Alphabet and Amazon (NASDAQ:AMZN); however, management must continue to look to be leaders in the race to an autonomous car.

With the company trading near $11 per share with a P/E ratio of approximately 6, the company appears to be undervalued compared to the current S&P 500 P/E ratio of just over 20. Additionally, the company yields over 5% and earns $1.86 per share. Despite a sluggish start to the year with this low valuation, I do not see anything in the near term that should weigh heavily on the company's stock and expect a rebound. Given this low valuation and the long-term optimism with Ford, I'm extremely encouraged by the U.S. sales results the past few months. I am excited about the company's future. With consumers purchasing more expensive vehicles, it will allow Ford to report stronger top line and bottom line growth going forward in 2016. I remain bullish on the U.S. automobile industry and expect the industry to post results similar to 2015. Furthermore, I believe Ford has a strong product mix to take advantage of the growing market and will pay investors an above 6% dividend yield to own the stock.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in F over the next 72 hours.

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.

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