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Taking a Shot on Ford Stock Now Wouldn’t Be Completely Crazy

James Brumley

The headlines currently surrounding Ford Motor Company (NYSE:F) are more than a little alarming. Although Ford stock price regained some lost ground on word that new tariffs on imported auto parts wouldn’t be imposed for six months, those tariffs are still on the table.

Ford Stock Isn't as Cheap as It Looks

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In the meantime, Ford’s automobile dealer receipts fell 1.1% last month. The recall of 270,000 of its Fusion vehicles isn’t a credibility booster for Ford stock, either.

Still, for investors who can take a big step back and look at the bigger picture, F stock is an interesting, although not bulletproof, addition to portfolios right now. Though Ford stock is probably not a great fit for grandma’s retirement portfolio just yet, it might be a good, overlooked fit for traders who can take a calculated, high-payoff risk.

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Car Mania, Redux

Since the U.S. and China are in the middle of negotiations, the new tariffs on auto parts imported into the U.S. from China will not go into effect by their original May 18th deadline.

But the flipside is that tariffs on completed automobiles from China will also not go into effect. So for Ford as well as rivals like General Motors (NYSE:GM) and Tesla (NASDAQ:TSLA), the situation is a mixed blessing.

The delay is arguably more beneficial than not for the United States’ auto industry, which needs Chinese-made components more than American consumers want Chinese-made cars.

The entire matter, however, isn’t nearly as relevant to automakers as it’s being made out to be by headlines. The United States’ and China’s auto market were both running into headwinds before the tariff wars started, with America’s peak auto sales ccurring in 2015. and China’s automobile sales peaking in 2017, crimping Ford’s business in both nations

That by far is the bigger headwind working against Ford stock at this time. By 2015, due to the exceptional length of the economic recovery, anybody in the United States who wanted a new car had that new car.

Now, four years removed from the peak of new car sales, the average age of vehicles still in use has reached a modern-era record of 11.8 years. That’s a testament to quality, but it still pushes the limits of how long vehicles can realistically last. Thus, another upswing in vehicle demand could occur in the U.S, boosting Ford stock price in the process.


Timing Is Everything

The next wave of vehicle sales will be led by trucks, SUVs and crossovers.

That’s a paradigm shift that Ford initially missed, perhaps partially because the company has had three CEOs since 2014..

But there’s a light at the end of the developmental tunnel for Ford.

“Our annual Car Wars analysis indicates that Ford will have one of the freshest line-ups in the US market over the next four years,” explains Bank of America Merrill Lynch analyst John Murphy. Murphy goes on to say of his recent upgrade of Ford stock “Combined with the company’s strategy to exit the passenger car segment, this product cadence bodes well for market share, mix/price, and profits in Ford’s North America business.”

More importantly for the current and prospective owners of F stock, Murphy believes “Ford is just starting to hit a more sustainable inflection in earnings (even more so in 2020), driven by the combination of a favorable product cadence in the all-important US/[North America] market and restructuring efforts.”

China’s auto market, as well as Ford’s piece of it, is working its way through a similar reshaping.

Murphy isn’t alone in his bullishness on Ford stock. Jefferies analyst Philippe Houchois just upped his price target on F stock to $12.50, noting “broad-based improvements, guidance upgrade, dividend confirmation and reduced credit risk should go a long way towards convincing investors to re-visit Ford’s investment case.”

Both arguments point to this year being a turning point for the company, not driven by economic forces, but by the end of an overhaul that took too long to complete.

The Bottom Line on Ford Stock

Analysts, on average, are looking for Ford’s sales to drop a couple of percentage points this year and then finally even out next year en route to what will (hopefully) be sales growth. The bottom line, however, appears to have already made the turn. Last year’s income of $1.30 per share is projected to improve to $1.39 per share of F stock this year, and next year’s average estimate of $1.40 per share is probably unnecessarily cautious.

Even so, priced at only a forward-looking price-earnings ratio of 7.3, the current Ford stock price is one that gives the automobile icon no credit whatsoever for anything it’s still doing well. Even just a slightly stronger hint that it’s turned the corner could be enough to spur the next leg of a rebound that got going in March.

If the company can beat a couple of consensus quarterly earnings and revenue estimates before the year ends, Ford stock may even break out of a funk that’s been driving it lower since 2014.

As of this writing, James Brumley held a long position in Ford. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.

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