Why Second-Fiddle Ford Is Still a Virtuoso Stock

It's tough to be Ford (NYS: F) . The company has played second fiddle to GM (NYS: GM) in the U.S. auto market for more than half a century. Things were starting to look up after a solid 2011, but 2012 brought bad news. Despite some troubling signs, I think Ford is still a virtuoso stock for investors. Here's why.

Go further
Through the first quarter of 2012, earnings fell compared with the same quarter in 2011. The second quarter isn't looking good, either. Ford recently announced that overseas pre-tax losses could be far worse than the first quarter.

Ford's gloomy news stems primarily from Europe. Sales for the first five months in 2012 in Europe were down 7.6% compared with the same period last year. Ford CFO Bob Shanks said the situation in Europe "has deteriorated significantly" from earlier guidance this year, largely because of the "serious economic crisis."

That's bad news for sure. But as Ford's new slogan says, let's "go further."

Despite sales decreases, Ford strengthened its position as the No. 2 best-selling European brand for total vehicles and passenger cars. Ford can also address the hemorrhaging in Europe until a recovery takes root across the pond, reducing capacity by shutting down one of its five European plants. GM has already announced the closure of one of its plants in Europe.

In the meantime, Ford's U.S. sales are booming. May sales were up 13% compared with last year. Gains were solid for cars, trucks, and utility vehicles.

The company is doing well in the huge Chinese market, too. Its passenger cars set a new sales record in China in May with the new Focus. By 2015, Ford should be selling 14 additional models in China through its 400 dealerships there.

The Blue Oval is back
There's more good news for Ford beyond strong U.S. and Chinese numbers. The company pledged its well-known Ford Blue Oval brand along with other assets as part of its loan package in 2006 that raised $23.5 billion. The inclusion of the Blue Oval as collateral essentially meant that Ford was mortgaging a major piece of its identity. As a result of the recent decision by Moody's to upgrade the company to investment grade, however, the Blue Oval is back in Ford's possession.

This is more than simply a psychological boost to the company. As Dan Caplinger wrote recently, the boost to investment grade "can make a huge difference in the way investors perceive the company."

Ford deserves it. The company has steadily grown its revenues and net income over the past three years. In March, Ford reinstated its quarterly dividend for the first time in almost six years. Even with the negative European situation, the company still expects its second quarter to be profitable.

Stock cheaper than a Yugo
Furthermore, the stock looks cheap. How cheap? Right now, Ford's trailing price-to-earnings ratio is barely above 2 because of a tax benefit that resulted in inflated earnings and a lower P/E ratio. Still, looking toward the future and stripping out the one-time tax benefit, you have a company with a forward price-to-earnings ratio of around 5. That's incredibly low when the broader S&P 500 average is hovering around 13.

Still, it's all about future growth prospects, and currently Ford has plenty. While investors hunting for growth might flock to an upstart automaker like Tesla (NAS: TSLA) , the electric-car innovation machine has yet to prove itself, especially against a century-old company like Ford. Ford generated profits in 2011 more than 6 times as large as Tesla's entire market cap. Still, Tesla is priced at 16 times sales versus 0.3 times sales for Ford. Is this warranted? Again, I don't think so.

Pickup down the road
Europe will rebound at some point, and Ford seems positioned well to benefit when its economy revives, thanks to a strong product lineup. In the meantime, the company continues to design and build vehicles that sell well in the U.S. and in other areas around the world.

Ford looks like a buy to me. However, waiting until the final Q2 numbers are reported makes sense. Shares could go down even more after the earnings release as the reality of the poor overseas results sinks in for some people. That would present an even more attractive buy point for long-term investors. The stock is likely to be somewhat volatile for a while, but Ford is a solid choice to profit down the road.

You can find out more about whether Ford is a buy right now in a premium research report prepared by one of The Motley Fool's top equity analysts. Gain instant access to this report.

At the time thisarticle was published Fool contributorKeith Speightshas no positions in the stocks mentioned above. The Motley Fool owns shares of Ford and Tesla Motors.Motley Fool newsletter serviceshave recommended buying shares of Moody's, General Motors, Tesla Motors, and Ford and creating a synthetic long position in Ford. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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