Ford's Stellar Results Should Push the Stock Higher

Ford's valuation doesn't do justice to its strong growth

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Apr 28, 2016
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Ford (F, Financial) has been a frustrating stock to hold over the past few years.

Despite the company witnessing many favorable trends, the stock has remained range bound and has headed gradually lower over the last year. I have been bullish on Ford for quite some time; however, I added Ford to my “Best Idea Contest 2016” portfolio when it was trading at the lower end of its range band. Since then, Ford has been the best performer in my portfolio.

Ford reported its earnings Thursday and comfortably beat the analysts’ estimates on all fronts. Ford has reported stellar earnings before only to see the stock crash in the next trading session. However, this earnings report was flawless, and the stock is up almost 4% now.

Ford reported EPS of 68 cents, beating the analysts’ estimates by a hefty 22 cents. The automaker’s revenue jumped a hefty 11% year over year to $37.7 billion, beating the consensus by $2.01 billion. Ford’s beat was impressive, and the stock’s upward movement isn’t surprising.

North American market still strong

Ford generates most of its sales from its domestic market; although the company is slowly branching out, the U.S. market remains its cash cow. Ford has boosted its sales in the U.S. by introducing the right models whereas its aluminum F-150 has also had great success despite sluggish production. Ford has increased its presence in the highly profitable SUV and truck market, which is probably why the company’s earnings came in a lot better than expected.

The F-150 was the best-selling vehicle in the U.S. for a 34th consecutive year, and it also boosted Ford’s overall margin as the average transaction price for the truck was a lot higher on a year-over-year basis.

Undervalued and an attractive buy

Despite Ford’s double-digit growth, the stock is trading at 7.4x trailing earnings. The market will probably never value Ford at a higher multiple, but the company has still managed to grow considerably, and its thriving presence in multiple lucrative segments should help it continue the trend.

Ford’s dividend yield is also pretty generous –Â almost 5.5%. Investors can buy Ford’s stock now that it is closer to the bottom end of its range band and is growing sales considerably and benefit from its generous dividend while waiting for it to move higher toward its fair value of about $16.

Investors should add Ford to their portfolios.

Disclosure: The author doesn’t have any position in the stock mentioned in the article.