Chances are Ford Motor Co.'s (F, Financial) profits will be strong thanks to the Trump administration’s corporate tax cuts.The company, however, is being traded like a small business right now, despite generating almost $2 per share in net income on $156 billion in revenue. But traders are pricing it like it will be out of business in six years.
Since rebounding in 2013 to 2015, the stock has been on a steady decline, falling from $17 to its current level just above $11 a share. While the business hasn’t grown in leaps and bounds, the whole company should be worth more than $45 billion. Tesla (TSLA, Financial) is priced at $48 billion and generates less than 8% of the total sales volume Ford does, at a significant loss.
Yet traders seem to be suckered into the growth story and technology innovation - the potential of future gains. To produce cars, you need money. Tesla is running out of it, while Ford has plenty. In fact, the company announced earler this year that by 2022 it will have 40 hybrid and fully electric vehicles in its model lineup, spending $11 billion to do so.
The risk-reward lies in debt income generated at Ford Credit. In 2017, the company took $2.3 billion in pre-tax profit on $151 billion in total debt loans. This is a long-term recurring profit center and, in 2018, they plan $2 billion in distributions - again, something to thank the president for.
Via Ford (Full PDF)
Where the risk comes in is when the next correction happens, will people keep paying for their cars? As interest rates rise, it’s harder to get people into cars, prompting a decline in sales, but not a decline in profits from loans. That would happen if the economy as a whole sees another recession, which is just as likely as any other time when the market wasn’t expecting it.
The bottom line
Ford is highly profitable.
Ford will remain profitable.
Ford will continue to pay out dividends.
Ford is trading at an ultra low valuation.
Ford will not be out of business in six years.
Guru ownership
Ford’s guru ownership is what many would consider the B team. While General Motors (GM, Financial) has heavyweights like Warren Buffett (Trades, Portfolio), David Einhorn (Trades, Portfolio), Jim Simons (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio), Ford’s largest guru shareholder is Richard Pzena (Trades, Portfolio). I don’t know much about him other than his firm manages over $25 billion and is publicly traded under the ticker (PZN, Financial).
“Despite increased chatter among investors surrounding higher and higher equity valuations, we continue to find what, in our view, are compelling opportunities with the potential for double-digit returns within the cheapest stocks.” -Pzena
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Disclosure: I am not long/short any stocks mentioned in this article.
