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Stock Analyst Update

Cost Headwinds Will Limit Ford in 2018

Although the automaker's stock is undervalued, we don't expect it to move significantly upward this year.

Mentioned:

We are not changing our fair value estimate for  Ford (F) after the company reported lackluster fourth-quarter numbers that were not a surprise given the announcement on Jan. 16 as discussed in our note on that date. As always however, we will reassess our model in February after incorporating the 10-K. We are willing to be patient with CEO Jim Hackett’s turnaround plan centered on cost fitness (as discussed in our Oct. 4 note) but we also stress that although Ford’s stock to us is undervalued, we do not expect the stock to move significantly upward this year.

We think the market is eagerly awaiting more specifics on how the company will achieve better fitness, but we also think that many cost reduction plans, such as reducing the number of vehicle combinations, will take at least another year to be more evident in results. At the same time management works through a multiyear restructuring, it is facing what we expect will be a declining U.S. auto industry this year, commodity and currency headwinds totaling $1.6 billion, and continued pricing headwinds in China. China may improve in the second half of the year once Ford gets new product into the market, but pricing headwinds remain for now. Chinese equity income for the full year declined year over year by 36% to $916 million and by 46% in the fourth quarter.

It’s hard for us to get excited about 2018 for these reasons even though we do think the cost reductions will ultimately be the right action. In the meantime, the stock pays a robust dividend yield, including a $0.13 per share special dividend payable March 1, of over 6% based on Jan. 24’s closing price. We feel this dividend is safe even in a downturn and we think in the long term, Ford shareholders will be rewarded by buying now just not in 2018 beyond the dividend.

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David Whiston does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.