Ford Stock Is Worth More Based on a Recovery in Earnings Next Year
Growth Stocks

Ford Stock Is Worth More Based on a Recovery in Earnings Next Year

Ford Motor Company (NYSE:F) looks like a good value here now that its Q3 sales figures are out and growth looks like it has returned. Ford stock still does not pay a dividend (canceled after Q1), but its valuation is cheap now that it’s on the road to recovery.

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Earnings are expected to be released on Oct. 28, but on Oct. 2 Ford reported its global sales figures. In the U.S., although total vehicles were down 4.9%, its truck sales were up 0.6% year-over-year. However, its F-Series trucks were up 10.1% over a year ago. In September alone they were up 17%.

More importantly, Ford’s Q3 sales were up 27.2% in the U.S. relative to Q2. In other words, the recovery and rise in demand from the Covid-19-related lows are kicking in. Moreover, its China sales were up 25.4% year-over-year and 3.6% on a quarter-over-quarter basis.

So the recovery is starting and as soon as a Covid-19 vaccine is available, I suspect sales will increase further.

Ford Is An Attractive Play

Analysts expect to see earnings of 18 cents per share for Q3. Earnings per share (EPS) for 2020 is forecast at negative 54 cents and for 2021 at 86 cents.

At $8.16 on Oct. 23, Ford stock is at a very attractive forward P/E ratio of just 9.5x 2021 forecast EPS. This is a very cheap valuation, although it is still slightly higher than the company’s average P/E. For example, Morningstar indicates that the average forward P/E ratio over the past five years has been 7 times earnings.

Barron’s recently reported that Benchmark analyst Mike Ward has a “buy” rating on Ford and a $10 price target. He believes that the third-quarter earnings could act as a catalyst for the stock well into 2021.

Improving North American markets, a positive mix — mainly with more truck sales — and improving credit metrics for buyers and the company are additional catalysts. He believes there will be a “tailwind for earnings into the second half of 2021.”

This is partly a result of the fact that dealers’ inventories are low due to the pandemic. That means Ford and other manufacturers will have to play catch-up in producing more trucks and SUVs.

What Analysts Say About Ford

TipRanks.com reports that 13 analysts who have written up the stock in the last three months have an average target of $8.30 per share. That represents just a 1.72% gain in Ford stock — basically nothing. So much for faith in the company.

Similarly, Marketbeat.com reports that 17 analysts have an average consensus target of $8.47 per share or a possible upside of just 3.75%. Seeking Alpha also has a survey that says that analysts have a consensus target of $8.19 per share.

In other words, no one really believes in the company or in a turnaround in the stock. That is typical of Wall Street sell-side analysts. The trend is their friend. Very few are willing to step out of line and make out-of-consensus predictions.

What to Do With Ford Stock

The thing that many of these analysts forget is that the company could easily afford to reinstate its dividend once it begins to make positive free cash flow (FCF). That is likely to happen next year.

This could present the company’s board with the option of restoring or even partially restoring the dividend. Ford used to pay a quarterly 15 cent per share dividend. It may want to retain some of that in order to invest in the future and in electric vehicles.

But even with half that dividend per share next year, the stock would have a pro forma dividend yield of 3.67% (i.e., 30 cents divided by $8.16 stock price). That yield combined with the company’s low P/E ratio makes Ford stock an attractive investment opportunity right now.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.

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