At 115 years old, Ford Motor Company (NYSE:F) has had to adapt to many wrenching changes. World wars. A Great Depression. The emergence of low-cost Japanese automakers. The Great Recession. Ford stock is tough.
Through it all, Ford has been able to find ways to overcome the challenges, and become a stronger company. Keep in mind that it now has over $156 billion in annual revenues.
Yet might the tumultuous changes in technology be too much for Ford stock? Could the company be a target of disruption?
Well, I can understand the anxiety. Let’s face it, companies like Tesla Inc (NASDAQ:TSLA), Uber, Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) and Lyft are pushing major breakthroughs in the transportation industry. And there are few signs that things will slow down any time soon.
But despite all this, I still think Ford has some key advantages and will evolve. If anything, the New Age of transportation is likely to be more of an opportunity then a threat.
So yes, I think Ford stock does look attractive right now– and here are three reasons why:
Advantage #1: Technology
General Motors Company (NYSE:GM) showed Wall Street that traditional automakers are not dinosaurs. Note that the company recently struck a deal with SoftBank Group, which invested $2.25 billion in GM Cruise Holdings, which is focused on creating driverless vehicles. GM bought this company for $1 billion several years ago and it is now worth about $11.5 billion.
But money was not the only factor in this deal. In fact, it may be the least important part of the relationship. SoftBank will bring strategic partners to the table, as the firm is an investor in Uber and China’s Didi Chuxing Technology.
OK then, what about Ford? It may seem that the company is being left in the dust. But then again, it’s important to keep in mind that Ford has been quite aggressive with its own investments in driverless cars. Consider that the company has created its own division, called Argo AI, and has agreed to poured $1 billion into it. The mission is to create road-ready autonomous vehicles by 2021.
The good news for Ford stock is that Argo has been attracting lots of talent. A big help is that the company is located near, Carnegie Mellon University, which is a hub for AI and robotics. According to a post in the Wall Street Journal, Ford has been snagging talent from companies like Apple Inc. (NASDAQ:AAPL), Google and Uber.
True, Argo may not necessarily snag a big investment from a marque tech operator. Yet it is reasonable to assume that the firm should still fetch a healthy valuation anyway, in light of Softbank’s move. To put things into perspective, the value of GM Cruise Holdings business is roughly 24% of the market cap of Ford stock.
Advantage #2 – Focus, Focus, Focus
In order to allow for the investments in new ventures like Argo, Ford has been rethinking its traditional business. And yes, management is being bold. The plan is to nix its line of sedans in the North America market, except for the Mustang and the Focus Active crossover.
This is certainly a risky move. Let’s face it, if there is a spike in gas prices, there will be an adverse impact on sales. But Ford realizes that the bigger risk is being too stretched, which means not devoting enough managerial bandwidth to higher-growth opportunities. Besides, there will also be more incentive to build cars that are more fuel efficient or rely on alternatives sources, like electricity.
Advantage #3 – Financials, Valuation & Dividend
Even though Ford stock has gone from $10.20 in March to $11.90, the valuation is still dirt cheap. The forward price-to-earnings ratio is a mere 7.7X.
More importantly, the earnings are likely to continue to rise. Part of this will be from the reduction of the number of vehicle models in North America as well as ongoing cost cutting. From 2019 to 2022, the company has identified $11.5 billion in cost reductions.
Finally, Ford stock sports an attractive dividend, of about 5%. This is a pretty good yield in today’s market and will provide some cushion as the company continues to make big changes in its business.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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