While there are concerns over broader market valuations, there are still some individual stocks that trade at attractive valuations. Ford (F), for instance, looks like a deep-value stock with mid-single-digit price-to-earnings (PE) multiples. To top it off, the Detroit automaker has an attractive dividend yield of 5%, which is over three times what the average S&P 500 Index ($SPX) constituent pays.

To be sure, Ford stock has underperformed the markets in 2024, and is down 3.9% even as the broader indexes have hit record highs. The stock's underperformance isn’t limited to this year alone; the legacy automaker’s shares have lost over 30% in value over the last decade. 

Given Ford’s perennial underperformance, the stock has only been getting cheaper, and might look like a “value trap”. However, I believe the stock has limited downside from these levels and looks like an undervalued stock worth buying at these prices.

Why is Ford Stock Underperforming?

The automotive industry in general is going through a tumultuous period. Legacy automakers like Ford and General Motors (GM) poured billions of dollars into building electric vehicle (EV) capacity, only to discover that demand was not as strong as the markets previously envisioned.

This has left automakers with excess capacity, and more importantly, spiraling losses in their EV business. Unlike its peers, Ford is quite transparent about its EV business, and reports the segment’s earnings separately

Ford Model e, which houses the company’s EV business, posted a massive pre-tax loss of $4.7 billion in 2023, as the legacy automaker lost over $40,525 on average for every EV that it sold. The company expects the segment’s losses to widen to between $5 billion-$5.5 billion in 2024.

What was expected to be a money spinner for Ford has now become a drag on its overall performance, and Model e losses are eating into the strong profits that the company’s other business segments like Ford Blue and Ford Pro are making.

Ford’s topline growth has also sagged while profits have been stagnant. Markets are also concerned about Ford hitting peak profits in the legacy business, something the company’s CEO Jim Farley does not agree with. 

Given the concerns over the sustainability of profits in the legacy business, and no clear roadmap to EV profitability amid the price war initiated by Tesla (TSLA), investors have been wary of legacy automakers, which is reflected in their low valuations.

F Stock Forecast

Wall Street analysts are not too bullish on Ford stock, and it has a consensus rating of “Moderate Buy.” Of the 19 analysts covering the stock, only 7 rate it as a “Strong Buy,” and 1 as a “Moderate Buy.” Eight analysts rate F stock as a “Hold,” and 3 more as a “Strong Sell”

Ford’s mean target price of $13.80 is almost 18% higher than Friday’s closing prices, while its Street-high target price of $21 (via Bank of America) is over 79% higher.

Ford Stock Looks Quite Undervalued

Ford stock trades at a next 12-month (NTM) PE multiple of 5.9x. The question of the stock's tepid valuations also popped up during Ford's Q1 earnings call, and Morgan Stanley analyst Adam Jonas pointed out it was ranked 491 out of S&P 500 index companies in terms of its PE multiple.

Farley pointed to the EV losses, and said they were an industry-wide problem. Notably, even General Motors trades at an NTM PE multiple of a mere 4.9x. Farley also said that markets are not yet fully aware of its Ford Pro business and its resilience. 

Notably, Ford expects Pro – which is its commercial business – to generate adjusted pre-tax profits between $8 billion-$9 billion in 2024. It forecast Ford Blue, which houses the internal combustion engine (ICE) business, to generate adjusted pre-tax margins between $7 billion to $7.5 billion.

In an ideal world, Ford Pro would have had a similar market cap to what the consolidated company is currently valued at. The company is also scaling up its hybrid portfolio and intends to launch hybrid versions across its portfolio. A mix of gasoline, hybrid, and electric cars gives Ford a lot of flexibility to cope with any changes in the demand environment.

Ford Should Continue to Pay Attractive Dividends

Both Ford and GM are generating healthy free cash flows, but are using the cash differently. GM is on a share repurchase spree, and recently announced a $6 billion share buyback that will go into effect next month, after the company exhausts the previous $10 billion authorization it announced last year.

Ford, which intends to return between 40%-50% of its free cash flows to investors, has instead increased its dividends, and topped them up with supplemental dividends.

Overall, while Ford’s price action has been disappointing, to say the least, I believe it’s a deep-value stock that should get re-rated over the medium term. In the meantime, investors can cherish the healthy dividend yield with the possibility of more special dividends as the company strives to return up to half of its free cash flows to shareholders.