This Iconic Brand Will Keep Driving Great Returns

By Matthew DiLallo - September 24, 2012 | Tickers: F, GM, HMC, TM | 0 Comments

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Well, I was wrong.  About a month ago I was quite sure I’d own a full allocation of Ford (NYSE: F) by now.  Their shares had other ideas as they hit the gas and sped 10% higher. 

Originally, I bought shares and wrote both puts and calls on this iconic brand for my virtual “No Drip, No Mess” Portfolio.  I did so with the thought of earning options income while their shares stayed stuck in neutral.   As it turns out, I actually did a tick better with a ten and a half percent return though a combination of capital gains with dividend and options income.  Despite losing most of my shares via those call options I've only just begun my long term journey with Ford.  

Since my original trade the only real news of note was a decent quarterly earnings report. What’s really been driving the stock is likely the announcement of QE3.  So, with no thesis altering news of note, I’m content to keep plodding along.  Still, it’s always good to be reminded why investing in Ford will produce market beating returns over time.  Here are three reasons why I continue to like the company.

Age of the Average Used Car

Everyone loves a classic, but as the average vehicle in the US is now over 11 years old it’s about time we put some of them out to pasture.  Back in 1995 the average age of the US auto was about 8.5 years old so we're really driving much older cars these days.  Eventually Americans will feel confident enough to begin to trade in their clunkers and when that does happen Ford will see more than their fair share of these sales. 

What’s important to note that it won’t just be a case where the rising tide will raise all boats.  Ford’s making cars that consumers really want.  They’re starting to build cars that are resonating with consumers who had been keen on Japanese automakers like Honda (NYSE: HMC) and Toyota (NYSE: TM).  Both the Accord and Camry have long been great selling midsize cars in the US.  For years both had been viewed as well-built when compared with American brands.  Ford’s begun to change that with their Fusion model.

Oil Prices Keep Rising

It’s that Fusion Hybrid model that has many excited as they recently announced it’ll get 47mpg on both highway and city driving.  This is better than the Camry Hybrid which is at 43/39 mpg.  It also beats both of Honda’s smaller sized Insight (40/43) and Civic Hybrid (44/44).  These numbers are important as oil and gas prices stay stubbornly high.  When those clunkers do finally get traded buyers will increasingly be seeking more fuel efficient cars.  Ford’s got the best midsized hybrid and you can bet on people taking notice.

Solid Fundamentals

Of the big three automakers Ford is in the best financial position.  Unlike rival GM (NYSE: GM) they didn’t take a bailout.  Because of that they also don’t have the same stigma overhanging their shares.  They’re not known as Government Motors.  They’re not pushing for the government to unload their 26.5% stake to remove a public stigma.  Ford drove through the financial crisis and hit fewer potholes along the way. 

Because of that Ford’s business is now running on all cylinders.  They are solidly cash flow positive, they’re paying down their debt and they recently reinstituted their dividend.  They’re also driving forward on their “One Ford” plan which is to deliver a “viable Ford delivering profitable growth.” 

The Trade:

Like I said in the beginning, I like what I’m seeing in Ford, but I want to be conservative and earn income until auto sales really being to show some improvement.  I do still own 100 shares of Ford from my original recommendation that I’d left uncovered and plan to keep then that way for the long haul.  In the near term though I want to keep generating options income and this time I’m going to do things a bit simpler and just write puts on to max out my 5% allocation on Ford.  Specifically, I’ll be writing four December $10 puts for about $37 per contract or around $150.  That works out to about a 3.7% yield on the cash set aside to secure the trade. 

I’m using puts to both generate income as well as to eventually buy Ford shares a bit cheaper.  If shares are below $10 in December I’ll take assignment and look to generate more income from Ford when appropriate.  Come December with shares of Ford above $10 I’ll again look to write new puts.

Ford is a great iconic American brand that I think will continue to drive returns for years.  In the short to medium terms those returns will come via options income.  Over time as the conditions improve and the One Ford plan begins to see fruit I think we’ll see a lot of upside in the shares. 

Dig Deeper Into 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.

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