Is Ford Stock Overvalued?

Ford Motor Company (NYSE:F) is a legacy American automaker based in Detroit, Michigan. The company was founded by Henry Ford, who’s credited with developing the assembly line and popularizing the motor vehicle. The company’s stock crashed in 2020, but Ford shareholders are used to crashes – and subsequent bounces.

When the stock more than doubled from its low point of the year, investors are asking is Ford stock overvalued?

Ford market capitalization of $35 billion is a speck compared to darling automaker Tesla. That’s somewhat surprising given that its Ford Sync and SmartLink systems have been widely praised. But newcomer Tesla Inc (NASDAQ:TSLA) passed Ford in the outside lane long ago. And demand for new cars is well below 2019’s levels.

Global travel restrictions and economic uncertainty means people are driving less and holding their cars longer. This puts automakers in a position of competing for shares of a smaller market. Government stimulus has been unprecedented but it’s still widely regarded as being insufficient to keep the economy chugging along at its former speed.

By navigating Ford’s roadmap, investors can determine if the company can accelerate its growth or will hit a wall trying.

Why Ford Stock Went Up

Ford crashed to a 52-week low of $3.96 before slowly climbing back up to the $10 range. One factor in its growth was the company’s efforts to reduce warranty costs, which rose by nearly $2 billion in the past three years.

Warranty costs are caused by manufacturing issues, so improving its reliability is key. The company is holding suppliers responsible for half of the costs, hoping that will encourage better quality control. It also made changes in the C-suite to reposition itself for the new direction in 2021.

CEO Jim Farley is focused on new vehicle launches for the first half of 2021. If the economy recovers, its new F-150 pickups and Bronco SUV could be big hits. However, that’s a big if. We’ll talk more about risks in a moment, but first here’s an overview of the company’s financials.

Ford Dividend Yield Is Tempting

For income investors, the Ford dividend is tempting: it offers a 6.57 percent yield. 

The company’s third quarter 2020 earnings report showed automotive revenue of $34.71 billion. This is above the $33.51 billion expected, which drove the stock price up. That’s nearly double its earnings from the same quarter in 2019.

It shows the company made the right moves to stay profitable in a tough market. Profits of $3.18 billion in North America alone gave the company plenty to be happy about.

Because of this, the company ended the quarter with almost $30 billion cash on hand and total liquidity of $45 billion. This is after repaying $15 billion in revolving credit drawn to get through the early days fo the pandemic.

Ford share price continued its upward slope through the fourth quarter on hopes that demand would pick up alongside an overall economic rejuvenation. It may take another year for the economy to fully recover, but Ford has its new product lineup ready for 2021.

But will anybody be able to afford it?

Is Ford Valuation Too High?

The pandemic dropped new car sales by a third, according to analysts. This is because people started leaning toward used cars while holding their vehicles longer. And a vaccine won’t necessarily trigger people to visit car dealerships.

Approximately 14 million Americans are still unemployed from the fallout of the pandemic, and the Centers for Disease Control and Prevention (CDC) recommendation against evictions and foreclosures ends December 26. This creates financial uncertainty over what next year will bring economically.

If Americans can’t get jobs, they have no reason to own cars. They certainly can’t afford a new one, and a $30,000 Bronco SUV is a big ask. The gas guzzler only gets 25 mpg in cities, while Tesla’s all-electric Cybertruck is set for release by 2022.

This could put a ceiling on Ford’s possible growth, especially if electric vehicles pick up steam as recent trends seem to indicate. It could cause Ford shares to fall.

Will Ford Stock Drop?

American automakers already had a crash in 2008 when lawmakers stepped in with a $25 billion bailout. It’s widely agreed General Motors (GM) did the best job of the big three American automobile manufacturers in its bailout recovery.

Ford, on the other hand, has been on a slow decline since 2013. That was the last time the company’s stock rose by any notable percentage. Tesla (TSLA) has amassed enormous buzz since and entered the S&P 500 as the biggest American car manufacturer by market capitalization.

That puts Ford in a position it’s not used to at the back of the pack. It has a Mustang Mach-E hoping to steal some of Tesla’s thunder though. This storied American sports car’s all-electric model could attract buyers and ultimately investors. Skeptics believe it could already be too far behind and chasing a trend.

Should the company secure its place in the EV market and keep up with competitors on in-vehicle infotainment and automated driving features, it should have no problem staying in the race.

Is Ford Stock Overvalued? The Bottom Line

Ford is a long-standing American automobile manufacturer that once ruled the roost. It lost its luster in the 21st century, as competitors like GM recovered from the bailout quicker. Meanwhile, newcomer Tesla rose from behind to take the pole position at the front of the pack as the most valuable U.S. carmaker.

But Ford stock did eventually recover from both the bailout and economic fallout. It has a new CEO and other leadership in place, and it’s gearing up for an resurgence in the coming years.

Reintroducing the legendary Ford Bronco, converting the Ford Mustang to an electric vehicle, and improving quality across its supply chain are big steps. They could be enough to at least keep pace with Elon Musk’s flashy announcements.

If it can prove its assembly line is still world class, the company could grow its market cap but likely won’t catch up to Tesla anytime soon.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.