4 Big Reasons To Buy Ford Stock As It Finds Support At $10 Level

Shares of Ford Motor Company (NYSE:) have struggled over the past several years as the company’s core growth fundamentals have been challenged by secular headwinds. There are two things at play. One, the entire automotive industry is shrinking due to ride-sharing trends. Two, Ford’s share in that shrinking auto market is likewise shrinking due to electric vehicle (EV) competition.

What Credit Tells Us About F Stock

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Meanwhile, against the backdrop of those two secular trends, Ford is only marginally profitable and has a significant amount of debt sitting on the balance sheet.

In other words, Ford is a barely profitable, debt-burdened auto company that is losing share in a shrinking market. That’s a losing combination. Thus, it should be no surprise that F stock dropped from $17 a few years back, to roughly $7 in late 2018.

But, the downtrend in Ford stock has suddenly and sharply reversed course. In 2019, Ford stock is up a whopping 30%-plus. That marks the stock’s biggest and longest rally in recent memory.

What’s going on the under the hood that has inspired this rare Ford stock rally? A few things. Importantly, all of those positive catalysts which have driven Ford stock higher in early 2019 should persist for the foreseeable future. As such, this rally in Ford stock isn’t over just yet. By my numbers, the shares should trade north of $11 by the end of 2019, and likely somewhere closer to $13.

As of this writing, Ford stock has been above $10 for about a month, which looks like it’s finding support at that all-important level. I think that’s the signal to buy into the stock for the rest of the year.

Favorable U.S. Auto Market Conditions

The first big thing driving Ford stock higher is a favorable U.S. auto market backdrop.

In 2019, everything has moved in favor of supporting continued healthy U.S. auto sales. The Fed has backed off its rate-hiking agenda, and borrowing rates remain very low. Inflation is muted. The economy is adding a ton of jobs every month. Unemployment rates are near all-time lows. Wage growth is firing off at decade-best levels. The stock market has moved higher. Consumer confidence is soaring to multi-year highs.

In other words, the U.S. economy today is defined by an employed American who is getting a nice raise, has a bunch of confidence, and has a ton of borrowing capacity to buy a car. The result? American consumers should keep buying cars in bulk for the foreseeable future.

Ford is a U.S company, and this company’s entire profit base comes from the U.S. Thus, as goes the U.S. auto market, so goes Ford stock.

Improving Margin Profile

The second big thing driving Ford stock higher is an improving margin profile in the company’s core auto business.

In the first quarter of 2019, Ford reported robust and impressive EBIT margin gains across its entire auto business, which signals a sharp departure from the 2018 trend of big year-over-year margin erosion. These margin gains should persist. Demand is stabilizing, which should help stabilize gross margins. Further, buying conditions remain favorable, and that should provide a lift to average selling prices and gross margins. Lastly, Ford continues to downsize operations with job cuts and the like, and that will remove opex from the system.

Overall, then, Ford’s margin profile should continue to improve throughout 2019. As it does, profit growth will return to the picture for Ford, and that will help push F stock higher.

Next-Gen Vehicle Ramp

The third big thing driving Ford stock higher is the fact that Ford is finally pivoting its resources towards developing next generation vehicles which, at scale, should help offset the aforementioned secular margin erosion concerns.

There are two big things here: electric vehicles and connected vehicles. On the EV front, Ford is pledging to have 40 hybrid and electric vehicle models by 2022. On the connected vehicle front, Ford recently partnered with Amazon (NASDAQ:) and Autonomic to help Ford build connected vehicles.

Meanwhile, executive chairman Bill Ford is . Late last year, the company invested $12.5 million in its Israeli subsidiary to establish a new unit that will focus on designing a decision-making system for autonomous vehicles. The great-grandson of Henry Ford is due back in Tel Aviv in coming weeks to open Ford’s innovation center there.

Broadly, then, Ford is pivoting aggressively into developing next-gen electric and connected vehicles. Thus, the Ford of tomorrow will have a vehicle roster that better aligns with secular demand trends than the Ford of today, and that should leader to market share stabilization in the future.

Cheap Valuation

The last thing here is that Ford stock is just really cheap. The shares trade at a single-digit forward earnings multiple with a near 6% yield.

To be sure, those multiples aren’t all that uncharacteristic for an auto company with small margins and a lack of long-term profit growth visibility. But, those low margins are heading higher, and that profit outlook is gaining visibility. As those two trends play out, Ford’s valuation should improve.

    I realistically think this company can do about by fiscal 2025. Based on a historically average 7x forward earnings multiple and a 10% discount rate, that equates to a 2019 price target for F stock of roughly $11. But, assuming some multiple lift towards 10x forward earnings and a 10% discount rate, the 2019 price target could realistically be around $15. Anyway you look at it, $10 looks like a good price to buy Ford stock at in 2019.

    Bottom Line on F Stock

    Ford stock has been a big loser for a long time. Early 2019 has been a sharp reversal in that trend, mostly because early 2019 has laid the groundwork for sustainable and healthy profit growth over the next several years. This sustainable and healthy profit growth will continue to push Ford stock higher in 2019, and in the long run.

    As of this writing, Luke Lango was long F and AMZN. 

    The post appeared first on InvestorPlace.

    The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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