3 Reasons This Automaker's Worth a Test Drive

After reporting better-than-expected earnings on Thursday, shares of Ford (NYSE: F  ) reached new highs for the year, around $18 per share. The iconic American automaker is clearly firing on all cylinders, and investors have good reasons to continue riding the stock for long-term gains.

1. Financial strength
Ford reported earnings per share of $0.45 for the last quarter, comfortably beating analysts' estimates of $0.35 per share, and delivering a healthy increase of 12.5% versus the same quarter in 2012. The top line was also strong, with revenue growing 12% and wholesale volume increasing by 16% year-over-year.

In a sign of confidence and optimism about the future, management increased its guidance for the rest of the year. The company expects to have a higher automotive operating margin and greater profits before taxes in 2013 versus 2012. Previous guidance said those figures would roughly match their 2012 levels.

Ford also contributed $1.1 billion to its global funded pension plans and settled about $700 million of pension obligations related to its U.S. salaried retiree voluntary lump sum program during the quarter.

The company has made an impressive financial turnaround over the last few years, and investors should feel comforted that it continues moving in the right direction, with strong profitability and an improving financial condition.

2. Growth opportunities
Ford gained market share in all global regions during the last quarter, a key aspect to consider in the wildly competitive automotive industry. Ford has materially improved the quality of its vehicles lately, and it´s gaining market share against GM (NYSE: GM  ) and Japanese players like Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) on a global scale.

Trucks are big profit makers for American automakers, and Ford enjoys a roc- solid leadership position in that segment: the F-Series has been America's best-selling vehicle for 36 consecutive years.

GM has recently renewed its Chevy Silverado and GMC Sierra models, but Ford still gained market share in trucks during September. While Ford delivered an increase of 9.8 % in truck sales for September to 60,456 units, GM reported a decline of 10.8% in Silverado sales, and a drop of 1.5% in Sierra during the month. 

Even if GM´s recent setback in trucks seems to be at least partially related to inventory problems, Ford´s long lasting leadership in this key segment bodes well in terms of financial performance over the next quarters.

When it comes to cars, Ford has gained a lot of terrain with successful models like Fusion and Escape lately. During the first nine months of 2013 Ford has increased its car sales by 12% versus 2012. That outgrew GM, Toyota, and Honda, which delivered increases of 1.7%, 6.4% and 8.6% respectively.

Ford´s leadership position in trucks is as strong as ever, and the company is gaining market share in light vehicles thanks to the improved quality of its products. In addition to good prospects at home, Ford has some exciting growth opportunities in international markets.

Ford had a late start in China, but the good news is that the company is running at full speed to compensate for the lost time. During the first three quarters of the year, Ford sales in China were up by a whopping 51%, thanks to strong sales in models like Kuga, EcoSport and Focus. The company still has a relatively low market share of 4.3% in the Asian giant, so China is offering plenty of room for growth over years to come.

Even under harsh economic conditions, Ford is seeing some progress in Europe: wholesale volume was up by 5%, and revenue increased 12% in the old continent during the last quarter. Management also reduced its expected loss in the region for the rest of the year, so the company seems to be on the right track regarding its Europe transformation plan.

3. Moderate valuation
In spite of all the positive news flow and a stock price rising by nearly 38% year to date, Ford still looks quite inexpensive when compared to industry peers. The company trades at a P/E ratio of 11.5, versus 12.5 for GM, 16.2 for Toyota and 19.3 for Honda.

The company reinstated its dividends in 2012, and doubled payments to $0.10 per share this year. Ford is paying a 2.3% dividend yield at current prices. Considering its comfortably low payout ratio -- in the area of 20% of earnings -- the company can easily continue rising its dividends in the coming years.

Valuation is not a matter of past price performance. Investors need to compare the stock price against fundamental measures of value like earnings and dividends, and from that point of view, Ford is still very reasonably valued. As long as the company continues moving in the right direction, its valuation levels still leave room for further gains.

Bottom line
Ford has made an impressive turnaround over the last few years, and its recent earnings results clearly confirm that trend. Its performance is stronger than ever; the company is gaining market share in different segments; and it has plenty of room for growth in key markets like China. Valuation is still reasonable, so investors have good reasons to continue riding the automaker for the long term.


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