Vince Martin | Jun 07, 2022 08:07AM ET
This article was written exclusively for Investing.com
There seems to be a simple and attractive bull case for Ford (NYSE:F) stock. Shares of the US car giant are cheap, at less than 7x the consensus earnings estimate for this year. Yet, the company should have potential for growth as its planned lineup of electric vehicles (EVs) comes to market.
Of late, that bull case hasn't helped: Ford stock has been nearly halved from January highs.
There are real challenges here and legitimate reasons why F stock is priced at such a low multiple to backward-looking earnings. Ford's sales for May highlight those challenges and show why the bull case isn't quite as simple as it looks.
From a headline perspective, Ford looks almost absurdly cheap. As noted, Ford is valued at 7x this year's earnings estimate; Tesla (NASDAQ:TSLA) trades at 59x on the same basis. The Ford dividend yield is a healthy 3% as well.
But in a historical context, neither the P/E multiple nor the dividend yield is all that distinctive. For most of the 2010s, Ford stock received a single-digit P/E multiple. For most of that decade, a low P/E multiple wasn't enough.
F shares ended 2019 below $10, down by almost half from 2014 levels. As the stock slipped, Ford's dividend yield kept rising; in December 2019, F yielded 6.3%, more than double the current level.
Simply put, Ford's own history shows that the stock isn't guaranteed to go up simply because the stock looks cheap. That aside, there's a case that the stock should look cheap, particularly right now.
After all, there are few more cyclical businesses than auto manufacturers. Demand can fade significantly when the economy turns downward. And investors generally discount cyclical stocks owing to their inconsistent earnings. At a moment when there are clear warning signs of a recession that could send Ford earnings plummeting, there's even more reason for caution.
There are longer-term worries as well. Automobiles have ever-extending useful lives. In 2000, there were 17.4 million EV sales increased 222% year-over-year.
That's the good news. But Ford's total sales still fell 4.5%, thanks to a 7.3% decline in ICE sales.
It's possible that Ford's EV sales grow faster than its ICE sales fall. Indeed, the company did take U.S. market share last month. But it's not guaranteed that the company can generate overall growth. At the very least, that growth is going to be muted to at least some extent by customer shifts away from its ICE lineup—which includes its market-leading (and highly profitable) F-150 pickup.
This doesn't mean Ford stock is a short, or that the company is going to go bankrupt. There's certainly still some potential for growth over time, even if results in coming quarters show some weakness. And at 7x earnings, Ford stock has room to rally if its EV strategy works out.
But that's a big if. Success is not guaranteed. Ford has a lot of work left to do. The decline in Ford stock seems a result of investors finally understanding that key fact.
Disclaimer: As of this writing, Vince Martin has no positions in any securities mentioned.
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