Over the last twenty-four months I have covered no other company more extensively on Seeking Alpha than Ford Motor (NYSE:F). Mr. Market has not had much love for automakers during this time, even though I have had high hopes for Ford Motor, for obvious reasons. Ford Motor has edged from one sales record to the next over the last two years, with strong sales gains on the back of growing SUV and pickup demand extending into 2016. Ford Motor crushed sales expectations in February with Y/Y vehicle sales growth in the United States exceeding ~20 percent. Ford Motor also sold 8 percent more vehicles in March 2016 than a year ago, but the auto maker missed the consensus sales growth estimate of 9.4 percent.
While Ford Motor was edging from sales record to sales record, an investment in the auto company did very little for shareholders (other than throwing off a dividend) over the last twenty-four months. As a matter of fact, Ford Motor's shares crashed ~19 percent in the last two years. In fairness, Ford Motor has paid a (growing) dividend during this time, and even declared a special dividend of $1.0 billion, or $0.25/share in the first quarter. As a result, Ford Motor's dividend yield jumped to ~6-7 percent at the beginning of the year.
Though Ford's sales have risen to decade-highs, Ford's valuation has not risen in lockstep. This is because Mr. Market expected (for quite a while now) that automakers are approaching a cyclical 'fall-off' in vehicle sales, thereby pricing lower sales and earnings rates into Ford's shares. The result is that Ford Motor's shares sell for ~6.4x 2016e earnings, thereby implying a significant margin of safety.
Upside Potential Remains, According to Barron's
While I have made my peace with Ford Motor likely going sideways this year (my 12-month price target for Ford's shares is $14), Barron's is out with a new piece on Ford Motor that's worth reading. Essentially, Barron's says that automakers including Ford Motor and General Motors (NYSE:GM) can climb higher because of efficiency gains and because of their low valuations. As a result, so Barron's, both automakers have 25 percent upside, or more.
Since Ford Motor sells for just ~6.4x 2016e earnings, there surely is a point to be made for capital appreciation. On the other hand, others have beat that drum (including me) for years, with very little to show for it. Ford Motor and General Motors are unlikely IMO to trade significantly higher in 2016 because of a lack of positive catalysts that could ignite a shift in investor sentiment. Ford Motor is worth buying for the dividend as far as I am concerned, but buying purely for capital growth might yield unsatisfying results moving forward.
Ford has a very appealing dividend, but one can't ignore the decline in Ford's total investment value over the last two years. Ford Motor is cheap for a reason (expected cyclical sales and earnings contraction). A lack of catalysts and absence of fundamental reasons for a change in investor sentiment will remain formidable obstacles for price appreciation. While I don't think Ford is worth buying for its near-term potential for price appreciation, Barron's is right about Ford's low valuation, and shares are surely worth buying for the handsome ~5 percent dividend. Buy for income.
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.