In the aftermath of the auto recovery, General Motors Co. (ticker: GM) became known as the “new GM” as it shed the old company image to deal with bankruptcy court. Lately, though, it seems GM’s competitor, Ford Motor Co. (F), is the one reinventing itself.
Ford, the second-largest American automaker, became an industry leader in 2015 by streamlining its manufacturing process and introducing aluminum-body F-150s into the marketplace. And CEO Mark Fields made headlines by announcing a $4.5 billion investment into electric vehicles — in order to appeal to consumers’ desires and more stringent emissions demands, Ford plans to build 13 new electric models by 2020.
More recently, reports surfaced that Ford is in advanced discussions to become the manufacturer of Alphabet’s (GOOG) self-driving cars. Alphabet is already outsprinting the competition in the driverless-car space, having recorded more than 1 million miles on public roads and having manufactured a prototype from the ground up. Pairing Ford’s mass-production expertise with GOOG’s technology could be a game-changing development.
But what does that all mean for the company? In 2015, F stock has declined 8 percent, meaning all these changes have done little to encourage investors to buy in. What’s up with Ford, and why haven’t investors tried it lately?
Ford’s electric push will take time. There are multiple tectonic shifts occurring in the vehicles we drive. Manufacturers are increasing the number of electric vehicles on the road as emission standards become more stringent. Ford says 40 percent of its lineup will be electric by 2020.
“It’s one of those long-term growth drivers that everyone likes to look at,” says Jeff Windau, an analyst for the Edward Jones financial services firm. “There’s definitely a lot of work being done on that front. It’s going to be a slow progression.”
But it’s a move the company has to make. As states pass tougher emissions standards, companies like Tesla Motors (TSLA) have entered the field — suggesting it wants to become one of the large manufacturers as well. Ford announced that some of the $4.5 billion investment into electric vehicles would be to improve the batteries used to run them, which would be a direct shot at Tesla’s battery.
Ford, though, appears to want to take a different approach on self-driving cars. Instead of designing its own autonomous vehicle, it looks close to partnering with Alphabet — the tech giant that recently changed its name from Google — as one of the leaders in producing self-driving technology. That can have benefits, since it’s unclear what type of technology will win out. But as Morningstar analyst David Whiston says, the potential partnership is “just the beginning of the process.” It will be years before Ford realizes the real impact.
Gas prices remain low, which is a boon for SUVs. The small SUV or light truck market has seen significant gains over the past year. According to Automotive News, sales on light trucks have increased 12.5 percent, and sales of crossover SUVs are up 17.6 percent through November compared to the previous year. That far outperforms the 5.4 percent growth the industry has seen in total vehicle sales. Ford has recorded a 12.8 percent increase in Ford Edge sales and an 18.9 percent jump in Ford Explorer sales from last year.
Light SUVs and truck sales are big wins for F stock because they offer better profit margins than its other vehicles. These sales “should continue,” says Whiston, because low gas prices have driven a push in light trucks and SUVs.
While analysts don’t believe the oil prices that have kept gasoline so low will continue forever, they also don’t believe they will jump considerably next year. But even if gas prices begin to creep up in the next year or two, Ford will be on solid footing thanks to its investments in overseas markets, Whiston says.
Aluminum trucks create copycats. One of the changes Ford made when it struggled through the recession was to reduce the number of car bodies used in vehicles. In 2007, there were 27 different bodies under use. Now that has reduced to nine, with a goal of dropping to eight.
This simplifies the building process, which allows the company to invest in new strategies, including the aluminum F-150.
It was a bold bet by Ford to introduce an aluminum truck, since buyers don’t know how long an aluminum model will last or how expensive it is to fix. But sales seem strong, as the F-Series line of trucks had its best third quarter since 2006, according to Ford. Competitors are now following Ford’s lead, with GM planning an aluminum truck release for 2018.
“Ford has been launching several new product lines,” Windau says. “Competitors will also be launching new models. We often see shift in market share on new models.”
The dividend is strong. Ford’s 5 percent increase in stock price over the past three years has come as the company continues to feel the boon of a six-year car buying boost. But it’s unclear if that will continue. “The growth rate is definitely slowing,” Windau says.
Ford stock has a 4.2 percent dividend yield, surpassing the average you will find in the Standard & Poor’s 500 index, which stands near 2 percent. But it’s not a cheap buy. At a 2016 price-to-earnings average of 7.4, it’s in line with its 5-year average.
Whiston takes a three-year view of the company, however, and sees F stock eventually rising to $20. If you do buy, you will get “paid to wait,” due to the dividend, Whiston says.
You’ll just have to hope that if sales of U.S. vehicles sputter, it won’t last for long.
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4 Facts to Consider When Buying Ford Stock originally appeared on usnews.com
