In 2018, stock investors faced a great deal of anxiety and turbulence. This was certainly true for those focused on the equities benchmarks, but it was even more true for those holding long positions in Ford Motor Company (F). As a measure of comparison, the S&P 500 finished the year with sizable losses of 7.03%. During the same period, Ford's shares plummeted 36.76%. The company faces obstacles both foreign (escalating trade wars with China) and domestic (rising interest rate policy from the Federal Reserve).
As a result, valuations for the classic automaker have declined by an incredible 56.90% since the stock hit its prior highs in July 2014. But those declines have generated drastically oversold conditions with Ford's shares now trading at a P/E ratio close to 5 and a dividend yield well above 7%. If the stock is able to simply revert to its longer-term valuation averages, Ford bulls have the potential to recoup a substantial portion of their losses in 2019.
At this stage, it is clear that many investors have lost confidence in the company's leadership strategies. CEO Jim Hackett has placed his focus on the production of SUVs and trucks, devoted more attention to the development of autonomous and electric vehicles, and moved away from strategies relying on sales of small cars. But these moves have become relatively commonplace within the industry, and many analysts have argued that Ford was far too late in the adoption of these trends. Ford's shares have fallen by roughly 32% since Jim Hackett assumed the role of CEO in May 2017, so it is clear that the market is not yet convinced that the company will be able to withstand the pressures of a recessionary economic environment.
That said, we must remember the recessionary environment of 2009 was markedly different than anything we could reasonably expect this time around. Demand for automobiles in the U.S. has begun to stall after peaking in 2017. But this is not surprising after nearly a decade of solid expansion, and U.S. auto sales actually surprised to the upside in the month of November. For these reasons, investors should not be concerning themselves with a "doomsday" macro scenario which would inevitably create more losses in Ford's quarterly performances.
The reality is that auto sales have held close to their peak figures, providing a stark contrast to the sales numbers from 2009 (when roughly nine million automobiles sold). These supportive trends helped Ford beat analyst expectations in the third quarter with adjusted earnings of $0.29 (versus $0.28 expected) and revenues of $34.7 billion (versus $33.3 billion expected). Of course, the auto industry is highly sensitive to changes in interest rates and this is a persistent factor which has been raised as a potential headwind for investors. But it should be remembered that these encouraging sales performances occurred as the Federal Reserve was extending its policies of higher interest rates, so the broader impact has been relatively limited.
Of course, there are still clear risks facing the company and it is important for investors to watch a few key areas for developments which may indicate a negative trend. One example can be found in the U.S. sales figures for Ford's F-Series truck, which have dropped by 5.8% over the last three months. Ford's F-Series has produced some of America's best-selling truck for more than 40 years, and its high margins have helped generate consistent profitability for the company during that period.
But recent news events suggest this monthly downtrend could continue. In December, Ford announced a recall of 874,802 trucks in the U.S. and Canada, and this could dampen enthusiasm in the company's efforts to reignite sales of the F-Series in Ford's home market. So far, Ford's van/truck and finance units have held up reasonably well. But most of the company's profits are still generated in the U.S. and management's inability to successfully restructure its overseas units has been a source of constant criticism.
Rising commodity costs have only added to pricing pressure issues in Europe, and the massive sales declines in China seem to continue with no end in sight. In response, Ford has appointed Anning Chen to revive troubled operations in the country (which is the world's largest car market). The prior head of Chinese operations quit unexpectedly for "personal reasons" and the long search to find a replacement indicates high levels of difficulty present in this daunting task to fix Ford's sales slump in the region. Declining sales in China have put pressure on Ford's cash flow figures, and this is a critical area of importance for long-term investors focused on the viability of the stock's dividend.
High levels of industry competition have also become apparent in the region. Last November, Japanese automaker Toyota (TM) has reported annualized gains of 23.8% in its vehicle sales in China (at roughly 135,700 units). During the same period, Ford reported an annualized decline of 55% in its vehicle sales in China (at 52,434 units). Unfortunately, these figures are not indicative of a single-month aberration as Toyota's vehicle sales in Chinese markets grew by an annualized rate of 19.5% in the month of October (at roughly 134,600 units).
Some of the blame for these negative performances at Ford can be blamed on an unfavorable macro scenario. But Ford's management team must also assume some responsibility here in its failure to grasp differences in local vehicle tastes. In response, Ford has announced plans to release a China-focused selection of new models at the beginning of next year in an effort to revive sales in the region. The only question is whether these moves will be "too little, too late."
Fortunately, Ford still appears to be on pace to come close to the $156 billion total sales figure that the company posted in 2017. Ford is expected to show profits of $0.33 per share on revenues of $36.3 billion in its next quarterly release. This covers the stock's $0.15 quarterly dividend by a wide margin, and these are performances which should help long-term investors sleep well at night without much cause for concern. We have seen a growing number of concerned analyst commentaries which suggest that Ford's dividend is in jeopardy. But with a dividend payout ratio of only 43.5%, those concerns seem overblown (or at least premature). Ford's shares are now trading with a P/E ratio of 5.04 and a dividend yield of 7.68%, and this latest drop into oversold territory looks like a strong buying opportunity for income generators.