Why Ford Motor Company Remains a Great Investment After Its Recent Dip

The U.S. automakers have come a long way since the financial crisis, not only in terms of stock price but in terms of becoming responsible, well-run companies that produce products that are as good as or better than their foreign competitors'.

The stock price of my personal favorite, Ford (NYSE: F  ) , has performed very well for a few years, and I was starting to think that the company was becoming less appealing as an investment. However, with the share price recently pulling back by about 14% from the highs reached in October, investors now have a second chance to get into this company whose revitalization is just beginning.

Present-day Ford
After a pretty unstable period from 2006-2009 or so, Ford seems to have gotten its groove back. The company has taken several prudent steps to ensure that it can operate as efficiently as possible.

For example, Ford has significantly scaled back its portfolio of automotive brands, having discontinued the Mercury brand and selling the Volvo, Land Rover, and Jaguar brands over the past several years. Ford has also significantly reduced its stake in Mazda from 33% to just 3.5%. Instead, the company is choosing to focus all of its energy on its core Ford and Lincoln brands.

Ford currently holds about a 10.5% share of cars sold in the U.S., which has dropped a bit in recent years as the company has unloaded some of its brands. The company holds a 20.1% share in the truck marketplace, which has held pretty steady over the past few years, as the brands the company unloaded didn't contribute as much to truck sales.

Recent developments
The reason for the recent drop in share price is that Ford recently warned investors of lower than expected margins and a tough economic climate for the company in 2014. Specifically, Ford had originally set a target of an 8%-9% operating margin, which it fears will not occur due to several factors such as poor market conditions in Europe and South America as well as the costs associated with introducing about 23 new models worldwide in 2014.

I see all of this as a temporary problem. The economic troubles in Europe won't last forever. How long is anyone's guess, but the region's economy will eventually stabilize and create better conditions for automakers. The new models being introduced are a case of spending money to make money. While it may cost the company in the short term, it should boost profitability in subsequent years (provided the new models sell).

Is it a good value?
At the current share price, Ford trades for just 9.6 times the earnings it is anticipated to report for 2013. Earnings are expected to shrink a bit in 2014 to $1.52 and rebound nicely to $2.08 per share in 2015. To further highlight the temporary nature of Ford's "problems," consider that at the current share price, Ford trades for just 7.4 times 2015's projected earnings.

While this seems very cheap, know that this is not without risk. Ford's profit margin is very sensitive to things like raw-material costs (which have been anything but stable lately) and its European business, which makes up roughly 40% of the company's sales. Still, I feel that Ford currently represents the best risk and reward trade-off out of all of the automakers.

While it is true that General Motors (NYSE: GM  ) also trades at a very cheap valuation, Ford has shown itself to be the more financially well-run company of the two in recent years, and I believe Ford's business carries a little less risk.

Toyota Motor (NYSE: TM  )  trades at a slightly higher valuation of 10.5 times this fiscal year's earnings, and carries with it the added element of foreign exchange risk, as the yen to dollar and yen to euro exchange rates have been anything but steady lately.

What to watch for in 2014
In the coming year, watch for any signs of improvement in Europe's economy, as this will be the key to Ford's earnings growth over the next few years. Also pay attention to how well the company's new models are received by consumers, as this could somewhat offset any European weakness in 2014. 

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