constitution warily: A second chance to buy Ford stock

Wednesday, September 5, 2012

A second chance to buy Ford stock

By Jack Hough

Stock investors who missed out on Ford?s turnaround of the past five years now have a second chance.

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The shares /quotes/zigman/264304/quotes/nls/f F +1.70% , which had risen from less than $2 apiece in 2008 to more than $15 early last year, have since slid to $9. The problem: Europe?s shattered economy has led to a plunge in car sales there. Last quarter, Ford lost $404 million before taxes in Europe, which cut into its $2 billion pretax profit in North America.

Management characterized the European results as ?more structural than cyclical.? Translation: The company isn?t waiting around for sales to pick up; it?s slashing production there.

This year, Wall Street expects the company?s earnings to decline to $1.26 a share, from $1.51 last year. U.S. car makers have a long record of false recoveries. But there?s reason to believe Ford stock is a bargain at today?s price.

/quotes/zigman/264304/quotes/nls/f F 9.57, +0.16, +1.70%
/quotes/zigman/3870025 SPX 1,403.44, -1.50, -0.11%

Ford?s U.S. sales are more than double its European sales, and so weigh more heavily on its results. Data released Tuesday showed the best August for U.S. car sales in five years. Sales for the company?s Ford brand rose 13.1% from a year earlier, while its Lincoln sales rose 1.7%.

In a conference call with analysts, Ford pointed to strong sales of its Escape crossover vehicle, Fusion sedan and pickup trucks. It didn?t break out average selling prices, but it said that Escapes were selling well at premium trim levels, a good sign for profits. It noted that dealers are seeing high-mileage trade-ins, suggesting pent-up demand.

Meanwhile, Ford earlier this year had its bond rating restored by credit agencies to investment grade from junk status. That allows the company to refinance remaining debt at lower interest rates, which should contribute to a virtuous cycle of lower interest payments and higher profits in coming years.

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Last year, Ford spent $817 million on interest. Wall Street projects that the figure will fall to $758 million this year, $737 million next year and $714 in 2014.

In December, Ford ended a five-year dividend drought by declaring a payment of a nickel a share, paid quarterly. The payment is only 16% of profit, about half the weighted average for companies in Standard & Poor?s 500-stock index /quotes/zigman/3870025 SPX -0.11% ?. But calculated against Ford?s fallen stock price, it makes for a dividend yield of 2.1%?on par with the S&P 500.

According to FactSet data, Wall Street expects Ford?s dividend payment to double by 2015. Stocks with hefty dividends, including utilities and makes of consumer staples like packaged food, have lately fetched premium share prices as investors search for yield.

Ford stock sells for around seven times this year?s profit forecast, making it half as expensive as the broad market. Profits are projected to rebound in coming years as the company winds down European production and pushes its Lincoln brand in China. Wall Street sees the company topping $2 a share in earnings by 2015 (from $1.26 this year, recall).

Plenty could go wrong. Ford has the experience and financial strength to respond to a downturn in Europe, but its profits could disappear in the event of a global recession. August U.S. sales for the industry suggest a yearly pace of more than 14.5 million vehicles. That?s closer to the peak, pre-financial-crisis years of more than 16 million vehicles than it is to the trough of fewer than 10 million.

In other words, most of the U.S. demand recovery for car makers is already priced into today?s results. It?s unrealistic to expect sales to recover quickly to all-time highs at a time when the broadest measure of unemployment (including those working part-time because they can?t find full-time jobs) totals 15%.

But even assuming modest sales growth, Ford seems headed for higher profits and larger dividends. That should help its shares outpace the broad market over the next few years.

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