The market’s in correction mode right now, so it’s not a fun time to be buying much of anything. But these are precisely the times you need to be putting your buy list together. While the overall market is still expensive and may have further to fall, there are some outstanding bargains out there. For those with an iron gut, this is the time to start nibbling.
Let’s take a look at Ford Motor Company (F). Ford has taken a nose dive in 2015 and is now down about 23% from its 52-week high. China woes, Fed angst and volatility in general have all conspired to depress the Ford’s stock price. But looking past the headlines, there is a lot to like about Ford. Let’s take a look.
Ford Stock is Cheap
We’ll start with valuation. No matter how you slice it, Ford is cheap at today’s prices. Ford changes hands at just 7 times expected 2016 earnings, and it sports a 10-year cyclically-adjusted price earnings ratio (CAPE) of just 6.5. If you use a 5-year CAPE, which would only include the healthier post-crisis years, you get an even cheaper 6.4
Stripping out the accounting gimmicks that can manipulate earnings, Ford trades at 0.38 times sales.
And let’s not forget that that sales have been depressed for years. Auto sales fell off of a cliff during the 2008 meltdown and have only recently returned to pre-crisis levels. If you can believe it, annual American auto sales are still below the levels of the early 2000s… despite the fact that the American population has grown by more than 30 million people since then.
Ford’s dividend yield is also one of the highest among major American companies at 4.3%.As seeing as how Ford only pays out about 60% of its (depressed) profits in dividends, I would say the dividend is safe for the foreseeable future.
If you owned Ford during the mid-2000s, this might be something of a sore spot. Ford cut its dividend in 2006 and eliminated it altogether a quarter later, as the company worked through some very difficult times. But since reinstating its quarterly dividend in 2012 at $0.05, Ford has tripled it to $0.15. I expect more dividend hikes to come.
I understand that the American auto industry has been facing major headwinds for decades. Foreign competition is relentless, and American automakers have the added difficultly of struggling to compete with a punishingly strong dollar. Plus, better public transit and the rise of Uber has made a car a lot less necessary in major urban areas. And capping it off, Millennials as a generation are just flat-out less interested in driving than previous generations.
I get all of that. But the average age of American cars still on the road just hit an all-time record this year at 11.5 years. That’s not saying that the average life of a car before getting scrapped is 11.5 years. That the average age of cars currently in use. That means that a significant portion of the American auto fleet is much older than that.
Hey, cars are built better today than they were 20 years ago and you can drive them for longer. Sure. But at some point, they really do have to be replaced. Americans have avoiding making car purchases for years due to the sluggish economy and lack of wage growth. That trend won’t last forever. Eventually, the wheels fall off.
I’m not currently long Ford. Earlier this year, I opted to buy competitor General Motors (GM) for essentially the same reasons. General Motors’ valuation is in line with Ford’s, though General Motors has the benefit of having a slightly cleaner slate after its bankruptcy swept away some of its legacy debts.
Are either of these stocks something I would want to hold for the long term? Absolutely not. The auto industry is extremely cyclical and one of the few remaining large industries still subject to extortion from labor unions. These are not stocks I would want to own for the long haul. But with a time horizon of 1-2 years, I expect both to post very respectable returns.
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. As of this writing he was long GM.
[…] By Charles Sizemore, Sizemore Capital Management […]