The company “Ford motor” (Ticker NYSE:f) not having a lot of 2018 so far. And there is no reason to expect that to change. F stock has fallen about 15% since its peak in January and back near five-year low at $10 per share. You may be wondering, “why is Ford stock so cheap?” Here is the answer.
In fact, there are good reasons for investors to be nervous. Their own CEO said that 2018 will be “a bad year”. The growth of prices and tariffs for goods will have a negative impact on profits of the Company. Increasing competition and potential decline in U.S. sales of cars also can hurt. Despite this, the company still has a strong dividend, but can that justify the holding of f shares today?
The Profit Margin Problems
In January, chief Executive officer of Ford Jim Hackett said that in 2018 it will be “a bad year”. He blamed rising prices on raw material prices in the amount of double strike on that front. InvestorPlace Luke Lango explained last month that:
“In the medium term, Ford is looking at much higher cost due to hefty tariffs on steel and aluminum. UBS projects, raw material costs Ford can grow by another $300 million in 2018 due to the growth of tariffs. Meanwhile, according to estimates by Goldman Sachs, which rates may affect the operating profit line, the Ford as much as 1 billion$, or about 7% in 2017 operating profit”.
Since then, we have seen fluctuations in the rhetoric of the White house on tariffs against China, negotiations NAFTA and other sensitive issues. Despite the progress, said earlier this month, it remains murky what will happen. Even if better results are achieved above steel, aluminum and other metals the prices will hit earnings at least in the first half of 2018.
Finally, it is worth noting that “General motors” company (Ticker NYSE:GM) is not specifically blame the commodity price Outlook to 2018. That suggests that Ford may become more vulnerable because of its reliance on Trucks, and it is possible that the user seeks to shift the blame from its own operational decisions.
The U.S. Economy and U.S. auto sales grow for many years. It is difficult to predict the next recession, but after nine years of growth, there is reason to suspect that the next economic dip is coming soon.
Automatic cycle is also a concern. U.S. car sales hit records of the last few years. Ultimately, however, users only need so many cars. When consumers buy more than one year, it leads to a decrease in sales in the future. After several years of record sales, the decline is to be expected. Lower used car prices and issues with the auto loan space indicate that the cycle can be.
In addition, long-term trends may hit Ford. The growth of services such as uber and lyft to make vehicle ownership less and less necessary. Many Millennials no long feel the need to buy or rent a car and in their late 20-ies. This trend may accelerate in the coming years.
In addition, ride-sharing services allow conventional vehicles to be used more, thereby reducing the total number of vehicles that you have bought and eventually sit unused most of the time.
Stock f: not as cheap as it looks
Many investors rely on the PE ratio to determine if a stock is cheap or not. It’s not a bad measure to rely on, to be sure. But that’s not all. In cases such as Ford, it can be outright misleading.
Here, Ford is trading at a ratio of trailing-6.3 x PE ratio and forward PE of 7x. That seems dirt-cheap compared to the s&P 500 in the 20-ies and other industrial companies such as Boeing (Ticker NYSE:BA) in the high 20’s.
However, there are several factors. For example, Union contracts remain problematic. When the company with the trade unions appears extremely profitable, workers often demand higher wages. Many airlines hit turbulence because of this problem.
Second, Ford thus, the Bank in disguise. Most of its profits not from production cars, but lending on them. Wall Street, tend to set relatively low PE ratios for banks in General, and subprime lenders in particular. And as we have heard, subprime auto loans begin to go bad, so the ROI here may fall in a hurry.
Finally, Ford still have a legacy left its pension obligations. They appear less now, but a bear market will probably cause the pension deficit to expand significantly.
The best Feature Ford stock: dividend
Action Ford is a good buy, if you care about profitability? For patient investors, you can ignore all of the above reasons to avoid stocks F. If you care about strong, reliable dividends, stock f fits.
The company’s 5.3% dividend is one of the largest you will find in the industrial space. Even if we assume that shares of Ford are not going to go away in 2018, dividends still beat the return you get on most bonds, which also usually does not offer significant capital growth, either.
Dividends, which certainly makes it much easier to stay with the stock F to the end of this year. For perspective, it’s starting to become brighter as more compact and more suitable makeup starts repayment. In addition, the sharp rise in metal prices should begin a return that leads to increase in the forecast.
F Stock Sentence
So, should I buy Ford stock now? Ultimately, I’m not a big fan at the moment, even with sales YTD. There are many dimensions to the game That makes it hard to predict where profits will eventually be. However, when the CEO says it will be a tough year, that’s a good sign to take a pass on the stock at the moment.
Although many efforts to revive the company should pay off, don’t forget that Ford is a cyclical company. And we’re closer to the end of a long economic growth cycle. Combine that with auto sales being extremely strong for several years now, and it’s hard to know where more demand will be coming from.
Even if we assume that the management does a great job, he works in some large obstacles over the next several quarters. As a result, I do not expect that the action of f to deliver far more than its admittedly attractive dividends.
At the time of this writing, the Author held no positions in any of the above securities. You can contact him on Twitter @irbezek.