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Ford Motor Company (F) Is a Bargain, Plain and Simple

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Ford Motor Company ( F ) claimed the No. 1 spot in monthly sales from General Motors Company ( GM ), but that's not a reason to buy F stock. Rather, the bull case on Ford stock is one of valuation.

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Source: Sean Davis via Flickr (Modified)

But more on that later.

F has long played second fiddle to GM in the U.S. monthly sales race, but March was a blowout for the automaker. And that's just the tip of the good news.

Ford sales rose 8% last month to 254,711 vehicles. That was its best showing since 2006. Importantly, sales of higher margin SUVs and trucks get credit for the performance. SUVs enjoyed a 13% increase in year-over-year March sales.

Another feat pulled off by Ford is what it's doing in China. Fears of an economic slowdown in the world's largest market portend doom for car sales, but Ford has thus far been shrugging off any weakness. March sales in China climbed 5% year-over-year to 114,788 vehicles. For the first quarter, Ford saw a 14% sales gain in China sales.

All this, does, however, come with an asterisk. Almost 40% of March sales were to customers like car rental companies, which get a break on price. In other words, these sales - known as fleet sales - were less profitable.

Buyer incentives and sub-prime car loans are other blemishes on the figures.

Is Ford Stock Correctly Priced for Risk?

Those are some of the concerns for anyone holding F stock. Fair enough. But the big one is that the market for new cars may have reached its cyclical peak. Dealers said retail sales fell 5% last month . And on a seasonally adjusted annual rate, U.S. light-vehicle sales dropped to a 13-month low of 16.56 million in March.

Ford stock is a bet on the future, not the past, and a slowdown at some point is inevitable. The good times can't roll on forever - can they? After all, times have been very, very good for Ford (if not F stock.)

The bullish argument on F stock says it essentially doesn't matter. The point is that these risks are already baked into F stock. It sure does look cheap.

F stock currently changes hands at just about 7 times forward earnings, yet it has a long-term growth forecast of 11% per annum. By comparison, the S&P 500 has a more expensive forward price-to-earnings ratio of 18.5 on a projected growth rate of less than 6% a year. At the same time, Ford's forward P/E offers a 25% discount to its own five-year average, according to Thomson Reuters Stock Reports.

Just because car sales are cyclical, doesn't mean they have to drive off a cliff. Some analysts say they will plateau at around 16.5 million to 17 million . That's rate any investor should love.

The bottom line is that Ford is a much leaner company these days, and it is selling vehicles people very much want to buy. Ford stock is significantly less expensive than the broader market, despite having much better growth prospects. That's a formula for market-beating returns if you can remain patient.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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


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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