Here is my best stock to buy in October
With the S&P 500 Trading at an average price / earnings (P / E) multiple of 34, now is a good time to consider value stocks – stocks of companies that trade at low multiples of their earnings and potential growth. Ford engine (NYSE: F) fits in the category because of its low valuation and convincing pivot towards electric vehicles. Let’s dig deeper.
Restructuring is bearing fruit
In 2018, Ford announced a massive restructuring and cost reduction program that saw it lay off thousands of workers and overhaul its product line to focus on higher-margin trucks and SUVs. The strategy is already having a significant impact on the company’s operations.
In June 2021, Ford’s US car sales volume fell to just 2.5% of its total vehicle sales, down from 20% at that time in 2018. The company is also exiting loss-making international markets – putting end to manufacture in India and Brazil, for example. Divesting unprofitable markets (Ford has lost over $ 2 billion in India over the past 10 years) could help free up capital and resources for the company’s transition to electric vehicles.
Meanwhile, Ford is leveraging its strong brands (namely the Mustang and the F-Series) to create an economic divide as its products gain recognition. The CNet review platform ranks its Mach-E as the best mid-size electric car for 2021, beating Tesla’s Model 3. impressive because three quarters of that number would be new customers. The company also recently converted two-thirds of the 190,000 bookings of its new Bronco into actual orders.
Navigate short-term challenges
Ford’s second-quarter revenue jumped 38% year-on-year to $ 26.8 billion, helped by an easy comparison to results hit by the pandemic in 2020. But not everything is smooth. The company is facing headwinds over the semiconductor shortage, which caused US sales to fall 33% in August. Analysts at consulting firm Forrester believes the shortage could last until 2023.
But Ford has used the crisis to modernize its distribution by focusing on order-to-order sales, which CEO Jim Farley says is better for its consumers and dealers. Customers get exactly the car they want (albeit with a delay) while dealerships have less inventory to manage. The chip shortage could also prompt Ford to prioritize the production of its most profitable vehicles, thereby improving its sales mix.
In July, management offered advice for the year, saying adjusted earnings before interest and taxes (EBIT) could total $ 9 to $ 10 billion, up from $ 2.8 billion last year. But it’s unclear how the uncertain semiconductor situation will affect this forecast.
Focus on value
With Ford shares rising sharply this year, more investors seem to be betting on its transition to a streamlined, electric-vehicle-focused automaker. Still, with a futures P / E multiple of 9, the stock is still very cheap compared to rival EV Tesla, which is trading 143 times futures earnings.
Ford is unlikely to equal Tesla’s stratospheric rating anytime soon (or ever). But its popular auto brands and aggressive restructuring plan make it a great alternative for value-driven investors who want to expose themselves to the electric vehicle opportunity without paying too much.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.