Ford remains the ‘Best in Class’

Ford remains the 'Best in Class'

Despite many cyclical consumer companies treading water in these turbulent economic times, Ford Motor Co. (f, Financially) continues to march up and down. While the market may not be conducive to auto stocks, many investors may want to maintain some exposure to the sector as part of a long-term investment strategy, and the company’s stock can be head over heels for a variety of reasons.

Most recent sales overview

Earlier this month, Ford reported that its US sales rose 27.3% in August, mainly due to SUV sales growth of 47.3% and electric vehicle sales growth to a monthly growth rate of 60%.

So why do Ford sales remain resilient during an economic downturn?

First, the automotive industry contains high barriers to entry, and Ford’s position as a market leader allows Ford to maintain its price power over its consumer base. In addition, the company’s bargaining power over suppliers is a significant bonus, as it managed to maintain a 15.91% gross profit margin, transferring its resilience as an automotive powerhouse.


Key Valuation Statistics

Starting with an absolute valuation point, Ford’s projected free cash flow indicates that stocks could hit $37 if market-based factors remain efficient.


Plus, the company’s relative valuations look good. For example, the stock’s price-to-earnings ratio is roughly 17.72% off its peers, indicating that the market underprices Ford’s earnings. In addition, the PEG ratio is only 0.02, meaning that the company’s earnings per share growth is 50 times higher than its price-earnings-to-growth. This leads me to believe that Ford is relatively undervalued.

Based on both absolute and relative valuations, it is clear that the stock is undervalued and good value for money.

Dividends galore

Ford recently reinstated its dividend program after payouts were suspended during the Covid-19 pandemic. Theoretically, the company’s dividend profile will attract investors, as market participants tend to look for income-generating stocks during turbulent economic times.

The chart below gives substance to the claim, as dividend-paying stocks have outperformed the broader S&P 500 on a normalized basis since the turn of the year.


Source: KoyFin

Many will question whether Ford’s dividend profile will persist during a potential recession.

Collectively, the operating cash flow of $12.40 billion and the dividend coverage ratio of 4.23 imply that the dividend policy is on some ground.


closing thoughts

Ford remains head over shoulders in this turbulent time for the economy. The stock has solid valuations and dividend characteristics remain solid.