Ford (NYSE:F) stock tumbled in late July after the company reported mixed second-quarter numbers which failed to inspire confidence in investors. Ford stock price had been bid up more than 30% in 2019 coming into the print.
From a headline perspective, Ford delivered a revenue beat and an earnings per share miss versus analysts’ average estimates, while its full-year 2019 profit guidance missed their consensus outlook. The combination of weak Q2 profits and low projected profits for Q3 and Q4 hit Ford stock hard. Ford stock price dropped more than 5% in response to the results.
But Ford stock looks like a compelling buy on this dip, mostly because if you zoom out, you will see that most of the meaningful trends are favorable for Ford stock. Further, those trends are likely to keep moving in favor of Ford with increasing velocity over the next several years.
With Ford stock price below $10, F stock is simply too cheap, considering this company’s current and forthcoming tailwinds. As a result, with Ford stock price down after a not-so-bad earnings report, I think this is an opportunity to the buy the dip of a stock which will inevitably head significantly higher over the next few years.
Ford’s Volume and Market Share Trends Are Improving
The first major trend is that Ford’s volume and market-share trends across the globe are broadly improving and should keep improving for the foreseeable future.
Fiscal 2018 was a year of huge sales volume drops and market-share erosion for Ford. In North America, its volumes dropped nearly 2%, causing its market share to fall 0.5 percentage points. In Europe, its volumes dropped 3%, leading to 0 3 percentage points of share erosion. Its China, its business tumbled and lost 1.30 percentage points of market share.
Overall, across Ford’s entire automotive business, volumes dropped nearly 10% in fiscal 2018, while the company lost 0. 7 percentage points of market share.
In fiscal 2019, many of those volume and share trends have turned around. Its North American volumes are still down YoY. But Ford’s market share in North America is roughly flat YoY, meaning that while the whole North America market is cooling, Ford is finally starting to stabilize and potentially even win back market share there. The company’s Europe volumes actually rose by 3% in Q2. Its China market share dropped by less than one percentage point in Q2 for the first time in a long time.
So it appears that despite a poor global auto backdrop, Ford’s market share and volume trends are making upward progress in 2019. This upward progress should continue because Ford is pivoting more aggressively into building an electric-vehicle lineup which is more relevant to today’s auto market and consumers.
Depressed Domestic Revenue Trends Will Turn Around
The second major trend is that Ford’s domestic revenue – while depressed through the first half of 2019 – should gain momentum in the back half of 2019 and into 2020 and 2021.
Ford’s North America revenues rose over 3% in 2018, as the company more than offset a nearly 2% drop in volume with price hikes. In 2019, though, revenue growth has slowed to below 2%, as volume losses have accelerated to 6%. Ostensibly, then, it appears that the company’s North America business is weakening.
But this weakness is a byproduct of a decelerating North America auto market (after multiple years of red- hot growth, U.S. auto sales have been flat in 2019), not a byproduct of Ford-specific problems. Ford’s North America market share is actually starting to stabilize after several quarters of large declines.
Overall, then, the implication is that once the North America auto market bounces back, Ford’s North America volume and revenue trends will rebound, too. The North America auto market should bounce back soon, given that interest rates look poised to remain lower for longer and that U.S. consumers are very strong. As a result, it seems likely that Ford’s depressed domestic trends won’t last for much longer.
Profit Trends Are Moving in the Right Direction
The third big-picture trend is that Ford’s profitability has improved dramatically in 2019, and should continue to rebound over the next few quarters and years.
Fiscal 2018 was a year of high investments for Ford, as the company took major steps to restructure its unprofitable international operations and lay the groundwork for long term profitability. As a result, its global automotive earnings before interest and taxes (EBIT) margins retreated 1.9 percentage points in 2018, led by huge profit declines in North America, Europe, and China.
In fiscal 2019, however, Ford is starting to reap some of the rewards of those restructuring efforts. Its North America EBIT margins are up nicely year-over-year, while its previously huge Europe and China losses have narrowed meaningfully. Its global automotive EBIT margins are up 0.8 percentage points in 2019. Its EBIT margins should continue to climb over the next few quarters and years as demand for its vehicles rise and its pricing power increases due to its more relevant vehicles.
The Bottom Line on Ford Stock
There are huge, non-cyclical headwinds impacting Ford stock, including the weakening of the entire auto market due to the rise of the sharing economy and the loss of market share thanks to growing demand for electric vehicles. But, with Ford stock trading at just seven times the average forward earnings estimate, those headwinds are fully accounted for by Ford stock price.
What isn’t accounted for is the fact that many of the big-picture trends are starting to progress in favor of Ford stock, including volume, share, and profit trends. As those trends continue to progress in favor of Ford over the next few quarters, the company will report stronger than expected numbers that will boost investors’ sentiment towards F stock, spark multiple expansion, force analysts to raise their estimates for Ford, and ultimately propel Ford stock price materially higher.
As of this writing, Luke Lango was long F stock.
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