Is Ford (NYSE:F) stock a buy right now?
It depends how you look at it. If you look strictly at traditional valuation metrics, like price-to-earnings ratio, Ford's stock looks fully valued by historical standards. It's not outrageously expensive, but it certainly isn't cheap.
It you look at what Ford is doing to increase its bottom-line results over the next few years, it starts to look more promising. But the ride from here to there could be a bumpy one.
Let's take a closer look.
Ford isn't cheap, but it's priced about where we'd expect
As I write this, Ford shares are trading at a little over $15. With $1.53 in earnings over the last four quarters, that gives us a price-to-earnings ratio of almost exactly 10.
That may seem cheap if you're used to high-flying tech stocks. But that's right where we'd expect a healthy Ford to be, by historical standards.
As you can see, Ford's valuation is right in line with Honda's, a little cheaper than Toyota's (NYSE: TM), a little more generous than Volkswagen's, and a lot cheaper than General Motors'.
(GM's seemingly high valuation is a classic case of a P/E ratio that doesn't tell the whole story. GM's big recalls meant big costs that weighed on its earnings in the first half of the year, but GM's underlying business is much stronger than those results suggest. If anything, GM might be a little undervalued at current prices -- but that's a discussion for another day.)
So at least by this simple metric, Ford isn't undervalued -- in fact, it's valued right where we'd expect it to be, if a bit lower than some of its peers. But this is where a closer look is warranted: Ford's current valuation doesn't reflect its significant potential for growth over the next couple of years.
What that price doesn't reflect: Ford is working toward significant gains in Europe and Asia
Right now, Ford's earnings picture is dominated by its North America region, as you can see in the chart below.
That chart shows pre-tax earnings for each of Ford's principal business units through the first nine months of 2014. The numbers change from quarter to quarter, but the basic story has been the same for several years: Ford's North America unit has been carrying the company.
And what's driving its earnings in North America? A lot of factors, but the biggest and most important one is this: Sales of full-size pickup trucks in the United States.
The bad news is that Ford's bottom line is very heavily exposed to the ups and downs of the market for pickups in the U.S. But the good news is that the market for pickups has been very strong for the last several quarters. Even better news: Ford is working hard to diversify its earnings sources.
Make no mistake, U.S. sales of pickups will continue to be very important to Ford. But while Europe and Asia haven't historically added much to Ford's bottom line, the company is moving aggressively to change that in a big way.
Ford's losses in Europe have been very heavy in recent times: $1.75 billion in 2012, $1.6 billion in 2013, and an expected $1.2 billion or so in 2014. But a restructuring effort begun in 2012 is taking hold: Those losses should narrow to just $250 million next year, Ford says.
Meanwhile, back in 2012, Ford said that it would spend nearly $5 billion on an aggressive expansion effort in Asia. One key goal: a 6% share of China's huge auto market by the end of 2015, up from just 3% in 2012.
Ford's share is closing on 5% now. It has already sold a million vehicles in China this year, for the first time ever. It has opened six new Asian factories since 2012, along with a slew of other facilities -- and it has four more factories under construction, slated to open over the next year. It's also rolling out its Lincoln luxury brand to Chinese customers, a move that could boost profit margins if Lincoln sales take off.
The costs of all of that construction and expansion have kept profits in Ford's Asia-Pacific unit modest, but that should change once those last factories are up and running in a year or so.
The upshot: Good potential for significant earnings growth, with some caveats
At this point, Ford CEO Mark Fields and his team are battle-tested veterans, having pulled the company through the financial crisis under the steady leadership of now-retired CEO Alan Mulally. Fields has already begun to put his own stamp on Ford, but -- importantly -- he's working hard to perpetuate and build on the transformational cultural and business changes set in motion by Mulally.
Ford's management isn't a concern. But there are some caveats to be aware of before you invest. Deteriorating economic conditions in Europe or China -- or the U.S. -- could throw wrenches into Ford's ambitious growth plans.
And the competition isn't standing still. Toyota, flush with cash thanks to a big exchange-rate advantage, is hinting that it will make an aggressive push for U.S. market share next year. And General Motors is in the midst of a new-product blitz that will leave it with the freshest lineup in the business in a year or so.
As a long-term investment, there's a lot to recommend Ford: Strong, stable management, competitive products, a healthy balance sheet, and a high likelihood of profit growth over the next few years. There's even a solid dividend: Ford's dividend yield is about 3.2% right now.
But over the next year or two, there could be some bumps in the road. If you like Ford as a long-term investment, use them to your advantage.
John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.