Ford: Time to Buy or Sell?
Mar 17th 2013 6:03PM
Updated Mar 17th 2013 6:06PM
There are a lot of factors that go into buying and selling stocks. I've had friends and family call me recently with questions about the market's record high. Some are nervous about investing more money right now, and I understand their hesitation. My advice to them is to plan for the long term and invest in companies in booming or recovering industries, with excellent management and financial stability. Does Ford represent those qualities?
Ford has also had a recent run-up over the past few months, giving some a reason to take profits. Does that leave Ford as a buy or sell right now? Let's take a look at those qualities, and others, that show Ford is a buy.
Management was confident enough in its sales projections and cost-cutting programs to double the dividend it pays out -- $0.40 a share annually. The yield now sits at about 3%, which is above its competitors. What's more, the 3% increases the interest in a different type of investor.
"The implied 3% yield now opens the stock up to an entirely new investor class," Jefferies & Co. equity analyst Peter Nesvold said. He also notes that income managers "look for a 4% to 5% yield typically before initiating a new position" but "might accept a 3% yield if they believe there is sufficient share price appreciation." He added: "We think Ford now meets these criteria."
That's great news for Ford and its investors, and a doubling of the check that Ford writes its investors each quarter is also a nice perk.
The Fusion, Focus, Fiesta, and Taurus show that Ford is making quality, fuel-efficient vehicles that will compete with Toyota and Honda for U.S. market share. Recently, Ford won six categories in the U.S. News & World Report "Best Cars for the Money" rankings. That was the most of any automaker, followed by Toyota, and also represented the majority of the nine awards the domestic automakers received total.
This quality is paying off, and the projected resale value of 2010 Ford and Lincoln vehicles increased by roughly $1,300 per vehicle compared with the 2009 models. That's the largest increase in the industry for full-line auto manufacturers. Why the increase in value? Simple: Because people actually want to buy these vehicles, and not just because Ford dished out large incentives to sell its vehicles.
Ford has done a great job paying down its massive debt incurred from its highly unprofitable years. Not only has it repaid all $23 billion of its 2006 loan, but it also has significantly less automotive debt than people realize. When people look at the statements, they see about $90 million in debt and might be shocked at the high level compared with those if its competitors. They don't realize that it's much more complicated than that. Ford's finance division accounts for about $72 billion of that debt. This debt is actually good! Its finance division brought in a profit of $1.7 billion last year by dishing it out to consumers at a higher interest rate. That amount almost offset 2012's losses in Europe entirely. Ford's automotive debt accounts for only about $13 billion, which is a very small number compared with past debt levels. Consider that between 2006 and 2008, Ford lost more than $30 billion.
None of these events would have happened without Alan Mulally and his excellent management team. I recently wrote why he is worth every penny, and I'm glad he remains in charge through 2014. Ford has made excellent decisions since Mulally took over. Its image has improved since it was the only Detroit automaker not to take the government bailout. Management has made quicker decisions in Europe to set it on track to break even faster than competitor General Motors .
Mulally had created a vision and a plan to return Ford to profitability after the U.S. recession, and it succeeded two years ahead of schedule. In 2006, Ford was losing almost $2,000 for every vehicle it sold. Since then, profits have flipped right side up, and the company is in its best shape in a decade.
Ford represents all of the qualities I mentioned in the intro. Don't worry about the market's record high -- it's still a great time to invest in companies with solid management and financials. It's even better if those companies are in recovering or booming industries, such as the automotive markets. Ford's making great strides in the biggest auto market in the world, China. It's also making higher-quality vehicles in that will be in the most popular segments going forward. And it's putting R&D money into fuel efficiency, which will definitely pay off in the future. Ford has a lot of things going for it, and I'm along for the ride. If you're a Ford bear, what do you think? Let me know in the comments below.
Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. The stock has recently taken off, and it appears that investors have begun to notice what Ford is doing right. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? For in-depth analysis on whether Ford is a buy right now, and why, you're invited to check out The Motley Fool's premium research report on the company, authored by one of our top equity analysts. Simply click here now to claim your copy today.
The article Ford: Time to Buy or Sell? originally appeared on Fool.com.Fool contributor Daniel Miller owns shares of Ford. The Motley Fool recommends Ford and General Motors and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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