Cheap stocks are often cheap because of poor financial performance. But sometimes savvy investors can find diamonds in the rough that can bounce back from past challenges. Ford Motor (NYSE:F) and Walt Disney (NYSE:DIS) are two dirt cheap stocks that enjoy compelling catalysts for long-term success. Let's dig a little deeper to find out why both companies could make great additions to your portfolio.
Ford Motor: A more profitable lineup
With a market cap of just under $29 billion compared to 12-month revenue of $118.61 billion, Ford has a price-to-sales (P/S) multiple of 0.24 -- lower than fellow automakers General Motors and Tesla, at 0.4 and 16.56, respectively. Ford generates a lot of revenue, but its low top-line valuation makes sense. Sales don't mean much if they don't lead to sustainable profits. That's why the company is working hard to boost its margins by improving its vehicle lineup.
As part of its multiyear restructuring program, Ford has discontinued most of its sedan models to focus on higher-margin trucks and SUVs. With Morgan Stanley analyst Adam Jonas estimating that Ford's flagship F-Series pickup trucks may be responsible for a staggering 90% of the company's global profits (companywide net income totaled $47 million in 2019 and $3.68 billion in 2018), this looks like the right move.
The new Ford Bronco, scheduled to be released in 2021, could also boost profits by up to $1 billion, according to analysts at Credit Suisse.
Ford's second-quarter revenue fell 50% to $19.4 billion because of lower wholesale volume and suspended production during the coronavirus pandemic, leading to an operating loss of $2.8 billion. But Ford could be poised for recovery in the third quarter as its restructuring strategy takes shape.
According to the most recent domestic sales report, Ford's U.S. operation sold 551,796 vehicles in the third quarter, which is only 4.9% below the prior-year period and 27% above the prior quarter. As expected, sedan sales plummeted by 37.5% as the company exited low-margin lines like the Fiesta and Taurus. The higher-margin F-series grew to represent 40% of all vehicles Ford sold in the U.S. -- up from 37% in the prior-year period. As truck and SUVs make up a growing percentage of Ford's sales, investors can likely expect improving margins and an eventual return to profitability in the crucial domestic market, which represents around 45% of global sales.
The U.S is historically Ford's most profitable region, generating $6.61 billion in automotive EBIT in 2019 compared to a loss of $47 million in Europe and a loss of $771 in China. While U.S. operations seem to be on the right track, It remains to be seen whether Ford's restructuring strategy will bring its international business up to speed.
Walt Disney: A fast-growing streaming business
Walt Disney currently trades at a roughly 20% discount to its 52-week high. The company was hit extraordinarily hard by the coronavirus pandemic, which sent revenue down 42% (to $11.78 billion) in the fiscal third quarter on weakness in the amusement park and studio entertainment segments. But despite the challenges, Disney is still a good bet for risk-tolerant investors because its streaming platform can evolve into an industry leader by leveraging its edge in original content.
Growth in streaming can help hold Disney over until the pandemic subsides and core operations recover -- or it could become the company's primary strategy for monetizing its intellectual property, depending on how the industry evolves.
The data is in, and Disney's decision to release the much-anticipated Mulan on video-on-demand was a mixed success, considering the challenging circumstances.
The film faced stiff competition in the Chinese box office (raking in only $23.2 million in the opening weekend, compared to analyst expectations of $30 million to $40 million). But the online release was a massive boost for Disney's burgeoning streaming business. According to data analytics company Sensor Tower, Mulan sent Disney+ downloads up 68% week-over-week (to 890,000) when it launched on Sept. 4, and the film generated an impressive $33.5 million in its first weekend on Disney+.
Disney won't have to share revenue with theaters or pay licensing costs to an outside studio, so investors can expect a large profit margin on those sales.
Disney plans to release another big-budget film, Pixar's Soul, to Disney+ on Christmas Day, at no extra charge to subscribers. While this could be interpreted as another "failure" for Disney's studio entertainment business, the potential boost in subscriptions, as well as the value added to Disney+, could make this decision worthwhile over the long term.
Management has announced a strategic reorganization of Disney's entertainment business to focus more on the long-term growth opportunity in streaming. This suggests the company could be moving away from traditional theaters and that big budget releases on Disney+ could continue, even after the pandemic is over.
Betting on a comeback
One thing that both Disney and Ford have in common is their strong brands. Disney is a blue-chip entertainment giant that has been around since 1923, while Ford is an iconic American automaker that has served customers since 1903. These companies have overcome pandemics and recessions in the past, and they look poised for continued success as they adapt their business models to this challenging economic environment.