Is Ford a Good Stock to Buy?
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Consumers supposedly have a better impression of Ford (NYSE: F) than of rival General Motors (NYSE: GM), but that relative advantage isn’t translating into much help for Ford’s business. In the second quarter of 2012, revenue was down 7% from the same period in 2011. With operating costs not declining at the same rate, and a few non-operating factors such as a higher effective tax rate, Ford ended up with less than half the earnings it had made in the second quarter of last year. Earnings per share for the first half of the year were $0.61, down from $1.20 a year earlier. Looking at more recent data, sales for the month of September- a good month for the auto industry as a whole- were flat, though small car sales were quite good. Ford rallied in the first quarter of this year, but has since dropped to 8% below its price from the beginning of 2012 and down 26% from its price two years ago.
The consensus on Wall Street for 2013 is that earnings will be slightly better, and so the forward P/E based on their expectations is 7. With the continued growth that analysts expect, the five-year PEG ratio is 0.8. Ford’s low stock price also makes its fairly low dividend a modest 2.0% yield.
Some value investors have come to see auto companies as good investments, and Ford’s low multiples make it no exception. Billionaire David Tepper’s Appaloosa Management increased its stake in Ford by 17% during the second quarter and owned a total of 7.7 million shares at the end of June (see more stock picks from billionaire David Tepper). Legg Mason Capital Management, a value-oriented mutual fund managed by Bill Miller, also increased the size of its position; it reported 11.8 million shares of Ford in its 13F portfolio (find more stocks owned by Legg Mason Capital Management).
GM’s performance has also disappointed investors, as its stock is down 28% since its IPO in November 2010--but at least one big name still thinks it’s a buy. David Einhorn of Greenlight Capital, who has lost a lot of money in GM, named it as one of his two long picks at the Value Investing Congress in early October. GM trades at 6 times forward earnings estimates, and its second quarter was a hair better than Ford’s, as its revenues were down 5% and its earnings were down 38% from a year earlier. It also posts an attractive five-year PEG ratio, with analysts’ earnings trajectory implying a value of 0.7. We’d say that any difference between the two companies is marginal compared to their valuation relative to the market.
Other auto companies include Toyota (NYSE: TM) and Honda (NYSE: HMC), with Goodyear Tire (NASDAQ: GT) representing another way to invest in a cheap company tied to autos. Goodyear’s forward P/E is 5, and while the company carries a good deal of debt and risks related to its pension program, it also has some attractive characteristics. Its earnings in its most recent quarter came in nearly twice as high as in the same period a year ago, and it is not as dependent specifically on new car sales as the auto manufacturers.
The other manufacturers have been seeing large increases in revenue and earnings, with the caveat that their figures were artificially low a year ago as they recovered from the effect of the Fukushima disaster on their business. Toyota and Honda trade at 11 and 7 times estimates of their forward earnings, respectively. Honda also has an attractive dividend yield of 3.2% and strong growth expectations from the Street (five-year PEG ratio of 0.3); all of this would seem to make the company to be a better buy than Toyota.
Ford and GM seem fairly valued relative to each other, and while they have been struggling recently their valuation deserves attention from investors. There are a number of other apparent values in the global auto theme, and in particular we’d single out Honda as an only slightly more expensive and better-performing company.
Interested in Additional Analysis?
Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But Ford’s stock seems stuck in neutral. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of The Motley Fool’s top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.