Why Is the Market Punishing Ford's Shares?

NEW YORK (TheStreet) -- The stock market is not efficient. All too often, poorly performing companies are rewarded when well-run, profitable companies are not.

Case in point: Ford Motor (F) over the past six months.

After issuing a profit warning in December for 2014 that the auto maker will only earn $7 billion to $8 billion in global pretax profit for the year instead of the $8.5 billion expected in 2013, Ford shares got crushed, falling over 10%.

Since then, shares have been stuck in neutral (pun intended) -- and for no good reason. At around $15.50, Ford shares are up nearly 9% for the past 52 weeks and slightly up for the year to date.

While this dropoff in profit is certainly significant, it is typical of Wall Street to overreact and start selling shares. Ford specifically said 2014 will be a transition year as it plans to unveil 23 new or remodeled vehicles compared to just 11 in 2013. It costs money to make money, and the fact that Ford is willing to invest so heavily in itself this year should be a positive sign for investors.

Further, since only 16 of those models will be available in North America, the company is making a clear effort in growing its international sales, specifically in China.

In fact, over the last two years Ford has quietly raised monthly sales in China dramatically from about 30,000 units in January 2012 to over 100,000 in March 2014. Although Ford's market share in China still trails those of the two largest foreign automakers -- General Motors (GM) and Volkswagen --  the company has made significant headway in a relatively short amount of time and is poised to grow further over the years.

To my mind, the popularity of Ford vehicles -- both in the U.S. and worldwide -- is nothing short of impressive. For the second year in a row, the Ford Focus was the number one-selling car in the world, helped by a 50% sales gain (year over year) in China. Meanwhile, in the U.S., the company's F-Series pickup trucks continue to be the most popular vehicle in America - and have been for decades.

Lastly, it should be noted Ford has a 50% market share in the police vehicle market, which it expects to maintain and even grow through its new Interceptor vehicle that will compete with the Dodge Charger and GM Caprice.

Any uncertainty over the next Ford CEO was cleared up when the company said COO Mark Fields would take over for the retiring Alan Mulally on July 1. Fields is a solid choice -- he has been at Ford for 25 years and has helped Mulally shape the company into what it has become today.

Also working in Ford's favor is its recent partnership with Alcoa (AA) to introduce aluminum into the body of its popular F150 model. The use of this material will reduce the overall weight and therefore help fuel-efficiency.


With all that, Ford has a strong balance sheet with a decreasing debt load that is now investment grade. Further, compared to GM, Ford has a much lower P/E ratio (9.7 vs. 18.7). I would also not be too surprised if hedge funds start to move out of GM shares due to the recent negative press and likely lawsuits, and into Ford shares over the coming quarters.

Ford is truly the better play and investors will be paid to wait (see: 3% dividend yield) in the meantime until Wall Street realizes the full potential of the company. It is during these times that the smart money accumulates cheap shares of quality, well-run companies that have been overly punished as they transition for future growth.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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