Is This $11 Auto Stock Running On Fumes?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Value investors have been bullish on the two big U.S. automakers that are still publicly traded. Their faith in one of them, Ford (NYSE: F), seems to be well-placed as of late.
As you can see above, Ford's dividend, while small, has been increasing in recent months. Ford's biggest U.S.-based competitor, General Motors (NYSE: GM), hasn't paid a dividend since it returned to the stock market. Ford's dividend yield is reasonable at 1.77%, but it is still dwarfed by Honda's ) dividend yield of 3.25%.
Honda recently reported profits of $1.06 billion, which marked a whopping increase of 36.1% compared to the same quarter last year. Research and development, increased sales volume, and unfavorable foreign currency rates helped Honda achieve these numbers. Honda also recently announced that it will invest $200 million into its factories in Ohio, which will add 200 new manufacturing jobs.
Meanwhile, the increasing dividend numbers indicate that Ford is doing well, but it still has a long way to go to catch up with its Japanese rivals. The third-quarter profit results indicate that Ford is starting to feel the effects of the European decline. The company's third quarter profit was $1.6 billion, which was down from the same period last year by only $18 million. That indicates Ford still seems to be doing well, despite its lack of a major investment in China.
Ford is taking some steps to jettison money-losing European assets. It has announced plans to close plants in Europe, including those in Southampton and Swaythling in the U.K. This step isn't likely to be politically popular, but it is the right one if Ford wants to stay in business and keep making money. The market seems to agree with this assessment: Ford's shares rose to their highest price since June on October 31.
There is also another reason for the increase in share price: Ford's impressive profit margin of 12% in North America. This seems to make up for the European black hole where Ford lost $468 million in the third quarter alone. These losses are troubling, but Ford has the resources to survive them. As of June 30, Ford had cash and ST investments of $35.6 billion. That gives it the means to survive several years of such losses.
The profit margin and the cash and ST investments make Ford look like a bargain at a price of $11.16 on October 31, yet Ford has a huge problem that value investors must take into account. Ford has no real market or growth potential outside of North America.
Unlike General Motors, which has a huge market in China, Ford seems to have little to nothing outside the U.S. and Canada. General Motors generated $114 million in profit from South American this year. General Motors' profits from its Asian business shot up 89 percent to $689 million this year. This is bad news for Ford, which earned just $9 million in profit in South America and $45 million in profit in Asia and the Pacific during the third quarter. Ford's losses in Europe exceeded what it made in Asia or South America. Ford was only able to overcome its weaknesses through strong profit of $2.3 billion in North America.
Ford has missed the boat on China, where both GM and Volkswagen (VLKAF) have been racking up huge sales. GM's sales in China grew by 664,765 in the third quarter of 2012. Volkswagen's sales in China grew by 704,991 in the same period. If such staid automakers as GM and Volkswagen can do well in China, Ford ought to be able to do the same, yet it has not.
These numbers indicate that Ford is going to have to spend a lot of money in China very soon if it wants to see real market share there. There is no way that the company can make such expenditures without cutting into its profit margin or spending a lot of that cash it has saved up.
That means Ford is not necessarily a good value investment. The company has only one market, and it is facing huge losses in Europe. Its growth potential is limited, and Ford is extremely vulnerable to any sort of economic downturn in the U.S. or Canada. The company has little to fall back upon if U.S. car sales decline.
Ford is a bargain, but it is sitting on extremely thin ice right now. It has managed to preserve its core market, but it hasn't figured out how to tap important new markets. Successful auto companies like Toyota (TM), General Motors, and Tata Motors (TTM) operate on a global basis. Ford has to learn to do the same if it wants to stay in the game.
Ford demonstrates that a low share price and strong fundamentals doesn't necessarily make something a value investment. A company with limited growth potential that will soon start bleeding cash will never be a value stock. Ford needs to show that it can tap into a large market beyond North America before it can be a real automotive bargain.
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.
StockCroc1 has no positions in the stocks mentioned above. 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.