Despite broader market concerns, certain individual stocks present compelling valuations. Ford stands out as a deep-value option with modest price-to-earnings (PE) ratios and a lucrative 5% dividend yield—a figure more than three times the average S&P 500 constituent.
Throughout 2024, Ford stock has lagged behind market performance, tumbling 3.9% while major indices reached historic peaks. This decline isn’t a recent trend; over the past decade, the automaker’s shares have shed over 30% in value.
Despite its sustained underperformance, Ford’s stock price continues to dip, raising concerns of a potential “value trap.” Yet, I posit that the stock’s downside is limited at current levels, representing an undervalued asset worthy of acquisition.
The Root of Ford’s Underperformance
Amidst turbulent times in the automotive sector, legacy automakers like Ford and General Motors (GM) are grappling with sizable investments in electric vehicle (EV) infrastructure, thwarted by weaker-than-expected EV demand.
This scenario has left automakers burdened with surplus capacity, leading to substantial losses in the EV realm. Ford, notably transparent about its EV operations, disclosed a staggering pre-tax loss of $4.7 billion in 2023 within its Model e division.
Originally anticipated to be a profitable venture, Model e now significantly hampers Ford’s overall performance, eroding the gains made by other segments such as Ford Blue and Ford Pro.
With stagnant revenue growth and flatlining profits, Ford faces skepticism regarding impending EV profitability amid the escalating price competition catalyzed by Tesla (TSLA). These factors contribute to the cautious valuation of legacy automakers in the market.
Assessing Ford’s Financial Prospects
Market analysts harbor modest sentiments toward Ford stock, rating it a “Moderate Buy.” Among the 19 analysts covering the stock, only a few label it as a “Strong Buy,” underscoring the mixed outlook surrounding F stock.
Ford’s mean target price of $13.80 surpasses current prices by almost 18%, with a Street-high target of $21—offered by Bank of America—projecting a remarkable 79% surge.
Finding Value in Ford Stock
Trading at a next 12-month PE multiple of 5.9x, Ford raises questions about its subpar valuation, as evident from remarks during its Q1 earnings call. Ford’s EV struggles significantly contribute to this, with CEO Jim Farley attributing them to industry-wide complications.
Highlighting the potential of its commercial arm, Ford Pro, which is expected to yield adjusted pre-tax profits between $8 billion-$9 billion in 2024, Farley anticipates enhanced market appreciation. Ford Blue, housing the internal combustion engine business, is also poised to deliver adjusted pre-tax margins of $7 billion to $7.5 billion.
While Ford Pro’s market cap should theoretically parallel the consolidated company’s current value, Ford continues expanding its hybrid portfolio, offering a blend of gasoline, hybrid, and electric models to adapt to market demands effectively.
Steady Dividends from Ford
In comparison to GM’s share buyback spree, Ford opts to allocate 40%-50% of its free cash flows to investors, supplementing dividends to cultivate shareholder value.
Despite Ford’s lackluster performance, I hold the view that it’s a hidden gem warranting reevaluation in the mid-term. Investors can relish the robust dividend yield and anticipate potential special dividends as Ford seeks to distribute a significant portion of its free cash flow to stakeholders.