Is Ford Stock Undervalued?

Is Ford Stock Undervalued? Ford has a global reputation for its cars and trucks, thanks to its history as an auto industry pioneer. From the moment it was founded in 1903, Ford was known for innovation, both in its products as well as in its production methods.

It was the first company to use a moving assembly line to build vehicles, and it was the first automaker to create cars for widespread use. Some even credit Ford with launching the American middle class, thanks to its commitment to paying workers a living wage. 

Unfortunately, the 21st century hasn’t been kind to Ford, and the company has moved from one crisis to another. After shares hit impressive highs in 1999, they gradually declined. Rock bottom came in 2009 at the height of the financial crisis. Consumers simply weren’t buying cars, and Ford’s stock sank to less than $2.

However, unlike its rivals, General Motors and Chrysler, Ford didn’t have to declare bankruptcy, and it didn’t need bailout money from the Troubled Asset Relief Program (TARP). It did accept a loan from the Term Asset-Backed Securities Loan Facility (TALF) to ensure it could remain competitive. 

In the years that followed the financial crisis, the economy recovered – but Ford did not. In September 2019, Moody’s announced that Ford’s credit rating would be downgraded, and S&P made a similar announcement shortly thereafter.

Most industry experts and market analysts predicted that Ford wouldn’t make it through another economic downturn. 

Despite the difficulties facing Ford over the past 20 years, some investors are still all-in. They are Ford enthusiasts who are absolutely convinced that their faith in the company will pay off sooner or later. Are they right? Will Ford stock go up?

Why Ford Stock is Down

Things were already looking sort of grim for Ford at the start of 2020, and then the market crashed. Share prices went from $9.42 on January 2nd to a shocking $4.01 on March 23rd.

Ford, along with many of its peers, announced it would suspend dividends to preserve cash during the crisis. The decision turned out to be a wise one, as second quarter results demonstrated.

Vehicle sales declined 33 percent for that period due to the impact of business closures, stay-at-home orders, and a general sense of insecurity among consumers. 

While stock prices have since crept back up to an extent, a majority of investors are unwilling to risk the consequences of an extended recession.

Unemployment is up, and COVID-19 is still spreading, which means anything could happen from a market perspective.

That, in addition to the uncertainty created by the upcoming US presidential election, has investors focusing on safer, more recession-proof assets.

Is that the right choice, or are investors missing an opportunity to buy Ford at bargain prices? 

Ford Financials: Volume Down Almost 5%

Third quarter was much kinder to Ford from a sales perspective. The company delivered more than half a million vehicles in the US market.

Though this was still a 4.9 percent decline year-over-year, the news could have been much worse. GM was down by 10 percent for the third quarter, which was roughly on par with other major automakers. 

Perhaps more importantly, Ford saw an increase in pickup truck sales, which is critical to the company’s future. The F-Series increased sales by 3.5 percent year-over-year, and the Ranger went up by 8.2 percent.

Ford Expedition sales went up by 4.4 percent, and sales of Ford Explorers increased by a stunning 73.9 percent. Since trucks and SUVs are far more profitable than cars, this is great news for Ford’s bottom line results. 

Is Ford Valuation Too Low?

The 2009 recession proved that Ford belongs in the too-big-to-fail category, and business leaders are working hard on executing a dramatic turnaround. However, it is not yet clear that they can be successful in reviving such a sick company.

Remember, Ford was in tough shape before COVID-19, and the pandemic made things quite a bit worse. It looks like the company is pulling out of its pandemic-related tailspin, but that doesn’t erase two decades of poor decisions. 

In other words, Ford may turn things around and return to a place of significant profitability. However, for now, its valuation is reasonably fair given the amount of uncertainty attached to the company’s future. 

Will Ford Stock Rise?

Some believe that Ford’s new strategy has potential to generate substantial future profits. The company has decided to discontinue production of automobiles, with the exception of the Ford Mustang, in favor of trucks and SUVs.

That change contributed to the decrease in sales for third quarter 2020, but it is expected to improve profitability, both short and long-term. If so, there is every reason to believe that Ford stock is set to rise. The question, of course, is whether this plan will indeed be successful. 

In mid-October, there was a sudden jump in Ford’s stock prices. In a single day, they increased by 7.2 percent. The cause of this rise appears linked to a report from Benchmark analyst Michael Ward, who decided that Ford is now on his buy list.

He believes that shares will hit $10 over the next 12 months, which could offer a tidy profit for investors who buy now. 

Is Ford Stock Undervalued? The Bottom Line

Some analysts say yes. They believe that the company will pay a dividend in 2021 that can support a higher per-share price.

However, given Ford’s losses in the second quarter and the potential for further setbacks in the coming year, not everyone is convinced. The new CEO appears to be making a series of advantageous moves, but one month in, he is certainly not proven. 

Overall, it is likely that Ford is mildly undervalued, but an investment carries higher-than-average risk. The company appears on-track for strong returns in coming years, but no one is fully confident that it will achieve its goals for growth. 

---

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.