Why Ford is cheap – and why it's a Bear Market purchase – The Motley Fool
Most auto stocks had a tough year in 2018, but Ford Motor Company s (NYSE: F) year was rougher than most. The Blue Oval shares ended the year down nearly 39% as investors became worried about Ford's operations worldwide.
What is not so easy to see is that Ford does the right thing to solve its problems. I think it's an exciting purchase at current prices, although the improvements can take some time to appear on the bottom line. Read on to learn why.
F data of YCharts. Figure shows the performance of Ford's stock in 2018.
Why Ford's stock is cheap
There are some reasons why the stock has fallen so dramatically. Most related to concerns about Ford's bottom line: Investors are looking for profit growth, but Ford's surplus has shrunk.
Revenues increased year on year in 2015, 2016 and 2017, but margins have not kept pace because Ford's costs have increased along with sales. There is a problem with "fitness" to use CEO Jim Hackett's term, and it's a problem that he and Ford's oldest team are working to solve by improving production efficiency and focusing on higher margin products.
Recently, concerns about some of the region's operations have increased. Ford is working to address all these concerns, but it has warned that improvements will take time to be visible.
China
The world's largest new car market was an important growth story for Ford a few years ago. But the business in China has had a tough turn: Sales fell 34% in 2018 to November. (The whole yearly figures for China and Europe will not be out later this month.)
Why the decline? Simply put, Ford's product "cadence", the frequency at which it introduces new models, fell behind the competitor's. It's a disadvantage anywhere, but it's a big problem in China's super-fast market. An incomplete dealer network and management that were not closely aligned with local trends did not help.
Ford has recruited a new leader for his China operation, streamlined his dealer operation and started working on a number of new models. It should help the ship, but it can take a few years to really turn things around – more about China's new car market stumbling over a long time.
Europe
Ford's biggest sellers in the old world are their small Fiesta and compact Focus sedans. Fiesta was brand new last year, Focus all-new this year, and both have sold well in 2018: In November, European sales of Fiesta and Focus were up by 30.2% and 9.5% respectively in 2018. [19659015] One green green 2018 Ford Fiesta tailgate with European driving plates, parked outside a French bakery. "src =" https://g.foolcdn.com/image/?url=https%3A%2F%2Fg.foolcdn.com%2Feditorial%2Fimages%2F505834%2Ffordfiesta2017_dingo_43.jpg&w=700&op=resize "/>
Ford will not offer its brand new Fiesta in the US, but it has sold very well in Europe Image source: Ford Motor Company
The problem: Ford's profit expectations for both (especially Fiesta) proved to be overly optimistic. has sold well, European car buyers increasingly choose crossover SUVs over traditional sedans and hatchbacks, just like their counterparts in other parts of the world – and Ford has had to grab the price to meet its sales targets.
Ford's small crossovers, EcoSport and Kuga (flight European twin) did well in 2018, there is an argument to be made that Ford, a prolonged SUV power plant, should have done even better. (Ford also sells the next size in Europe, but sales figures are small.) One problem: Kuga, like Escape, is an aging model that has mi Been a step to newer rivals – and can no longer command top dollar (or top euro) buyers.
It is not yet clear what Ford is planning to do in Europe, although it has said it will invest in more SUVs and vehicles for the region (see below for details on future products). More details about Ford's plan for Europe are expected later this year.
North America
Ford is still doing pretty well in North America, the most profitable regional market. Ford's US sales fell by 3.5% in 2018, but sales of the most profitable products remained good. Sales of the F-Series pickups, a key performance indicator, rose 1.4% in 2018 and prices have been strong, despite strong competition from all new models from Fiat Chrysler Automobiles (NYSE: FCAU) and General Motors (NYSE: GM) .
Ford's F Series Pickups continue to sell very well in North America, but other products have declined. Picture source: Ford Motor Company.
But here again, dated products probably cost Ford sales. Sales of their vacuum cleaner crossover SUVs in the US, Escape and Explorer, were both down the year year-to-November. And its sedans are in a big downturn: As a group, US sales of Ford fire engines were down 16.7% through November.
Ford does not have overcapacity issues that led GM to announce more construction rods in North America in November. Its plan to increase the profitability of the home is probably less drastic than its old competitor, and it is likely to be driven by a number of new products in the most profitable segments and market niches: SUVs, trucks, vehicles, and performance vehicles.
Because a large Ford turnaround is likely
Ford has a number of new products coming over the next couple of years, and it will go a long way to addressing all of the above concerns. These new products are all designed to maximize profitability, with many split parts under the skin and streamlined selection lists to simplify production.
Arriving in 2019:
- The production of the new Ranger pickup began in December, and the first examples would start coming to dealers shortly.
- All-new Explorer will be revealed this month and will go into production later this year. For the first time, it will be a hybrid version.
- An all-new Escape is also expected this year, with both conventional and hybrid drive straps available. (Not accidentally expected a whole new Kuga for Europe and China.)
- A new version of the Transit commercial van will debut this year.
Note that Escape and Explorer account for about 70% of Ford's total SUV sales; They are very important, and not just in the United States
Arrival by the end of 2020:
- A brand new terrain SUV called the Bronco, based on the Ranger's underpinnings.
- Another brand new terrain SUV, less than the Bronco.
- A brand new battery of high performance high performance SUV, the first of six new battery electric Ford due in late 2022.
- A renewed F-150 pickup, along with a first hybrid version.
- The Super Duty pickups were brand new in 2017, but they will be significantly updated by the end of 2020.
Beyond the above, Ford has promised some extra new products tailored specifically for the Chinese market. And while sedans are no longer a priority on Ford due to falling sales and concerns about profitability, the company's iconic coupe is set for a revolution: A brand new Mustang is expected in 2021 – and yes it will be a hybrid version.
The medium-sized Ranger pickup comes soon to US dealers. Many more new Fords will follow the next two years. Picture source: Ford Motor Company.
Why don't you have to wait for turnaround
But why invest in Ford now, when an economic downturn seems to be threatening right across the horizon? The answer lies in Ford's 7.6% dividend – especially in Ford's promise not to cut dividends unless it gets bad.
CFO Bob Shanks has repeatedly said that Ford intends to maintain its dividend at the current level ($ 0.15 per quarter) over the next downturn. It's not an empty promise: The cash flow from Ford's Catch Financing subsidiary will cover much of the cost of paying dividends, and Shanks has said Ford will be willing to hit its hefty cash hoard ($ 23.7 billion as of September 30, 2018) if necessary to ensure that payments continue.
Ford's promise to sustain the proceeds is not just a leadership blunder. It is a serious commitment that I expect Ford to stick with, unless the next recession is so serious or long-lasting that it is forced to dispose of that cash reserve. (Ford has a credit card to print if that happens, but they will not be used to pay the dividend. )
So to answer the question at the beginning of this section: If you invest in Ford now And reinvesting the proceeds through which economic storms and restructuring pains are ahead, you can be very pleased with the results when the economy begins to recover, and buyers find Ford's showroom full of new products.
One last thought
Ford's stock increased after the economic crisis 2008-2009, increasing 370% from the end of 2008 to the end of 2011. Why? Ford's sales jumped in the early stages of economic recovery because it had new products in showrooms, while rivals were scrambling to launch restarted development programs. Will the story repeat? It can only be.
