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Ford Motor: Is The Bottom In?

Ford Motor (F) offers income investors high, recurring dividend income while retaining considerable upside potential in case the U.S. and China work on resolving their trade differences. Ford Motor's shares are selling for a very competitive earnings multiple, and a resolution of the trade conflict could trigger a major multiple re-rating for Ford Motor. In the meantime, income investors get their hands on a 7.0 percent dividend yield.

Bottom Formation

Ford Motor's shares have sold off sharply in December when fears over an economic slowdown and an unresolved trade dispute between the United States and China - the two largest economies in the world - weighed on investor sentiment. Ford Motor's stock rebounded in January, however, and has now settled into a narrow trading range of $8.30-9.00. Shares are no longer oversold and appear to be building out a bottom.

Year-to-date, Ford Motor's share price has risen 11.6 percent.

Ford Motor - Strong U.S. Business Underpinning Value Proposition

Though the trade war has weighed on investor sentiment, Ford Motor's North America business is actually doing quite well: The geography produced almost $2.0 billion in Automotive EBIT and has been consistently profitable for Ford Motor in the last couple of years. On the other hand, other geographies such as Europe (ongoing restructuring), Asia/Pacific (trade uncertainty), and South America have not been doing all that well for Ford Motor.

Ford's revenues increased to $41.8 billion in the fourth quarter thanks to a strongly performing U.S. business, reflecting a 1.0 percent year-over-year increase. The company's adjusted operating cash flow also improved in the last two quarters easing investors' concerns over the impact of the trade stalemate.

Outlook 2019

Ford Motor is cautiously optimistic about 2019. Obviously, a resolution of the trade conflict could be a major, positive catalyst for Ford Motor's stock. According to Bloomberg, a U.S. trade delegation is heading to China this week in order to continue negotiations and work on a trade deal.

Here's Ford Motor's guidance for 2019.

Valuation

No matter what you think of Ford Motor and the trade conflict between the U.S. and China, there can be no argument that Ford Motor's shares remain in the bargain bin. Investors that seek to access Ford Motor's whopping seven percent dividend yield (the highest in the S&P 500) pay less than seven times next year's estimated profits.

And here's how Ford Motor compares against its closest U.S. peer - General Motors (GM) - in terms of price-to-forward-earnings-ratio.

Upside/Downside

A trade deal between the United and China has the potential to trigger a major re-rating of Ford Motor's (and General Motors') earnings multiples. A resolution to the trade conflict would not only lead to lower input costs for Ford Motor (lower steel, aluminum, and auto tariffs) but also eradicate a big source of uncertainty for investors. Should trade talks fail again, however, Ford Motor could head significantly lower and, potentially, test its most recent 52-week low @$7.41.

Your Takeaway

Ford Motor looks like a good deal here, though downside risks do exist, especially as they relate to another round of tariffs between the two largest economies in the world. The good news is that shareholders, as far as I am concerned, are hardly overpaying for Ford Motor's dividend stream at today's valuation. Ford Motor's shares change hands for less than seven times next year's estimated earnings, which reflects a high margin of safety. If the trade conflict gets resolved, Ford Motor retains considerable upside potential. Buy for income and capital appreciation.