American Companies on Sale: Where to Invest
The stock market's recent sell off has caused many nervous investors to move their money out of the market and onto the sidelines. This has created tons of opportunity for experienced and novice investors.
In this article we take a look at three American companies that have been around a long time, over 300 years combined. All three experienced sell offs and are in different stages of their investment cycle. We have a company that's trading very close to its bottom, another that is not to far from it's bottom, and the third that looks to be in the early stages of moving upwards. The three companies reviewed are American business hall of famers, but all have experienced a few tough years (some more than others). But now may be the time to add these companies to the portfolio, so lets take a look.
The 112 year old company that brought the world the Model-T and the mastery of the assembly line has fallen on hard times. With new management at the helm will 2018 be the year Ford's stock takes off?
Where the Stock is Now
Currently trading at $10.61 per share with a dividend yield of 5.66% at the time of this writing, Ford's stock has been on a slow decline since hitting $17.25 back in 2014.
Car buyers see Ford's line up as stale, there has not been much good news coming out of Ford and that is reflected in its stock price. Also, Moody's recently made a down grade to Ford's rating from stable to negative citing, "a more challenging operating environment." If reading the bad for Ford has you ready to move on to the next stock, we don't blame you.
The Car Market
January 2018 was a mixed bag for the U.S. auto industry. Car sales dropped 10% when compared to sales in January 2017. However pick-up trucks saw 5% growth versus January 2017 and cross-over vehicles saw almost 14% growth versus January 2017. How did this impact Ford? Not well at all, for January 2018 Ford reported a 23% decrease in car sales compared to January 2017, a decrease of 5% in SUV sales compared to January 2017, but pick-up truck sales increased by 2% versus January 2017. NADA, the National Automobile Dealers Association forecast 16.7 million new cars and light trucks sold in the U.S. in 2018. The expectation for 2018 is less than the 17.2 million vehicles in sold in 2017, but it still hints to good demand in the U.S.
Catalyst and Future Events That Could Move Ford's Stock
New Ford Chief Executive Officer Jim Hackett is said to have a creative management approach. He will need to muster up every bit of his imagination and creativity to get Ford turned around. Ford's current turnaround plan includes cutting $14 billion in cost and investing $11 billion in to their electric-powered vehicles. Ford also has plans to roll out a fleet of driverless cars for ride-hailing / ride-sharing service by 2021. The company that made its name selling cars is embracing the ride-hailing / ride sharing wave. The company was approved in London to operate its Chariot minibus service, designed to service the growing demand of people in cities that wish to make trips but prefer not to buy cars. Ford's Chariot bus already operates in NewYork, Columbus, Austin and San Francisco.
What to Love About Ford
From a valuation standpoint the companies trailing P/E, P/S, P/B, and P/CF are lower than some of it's main competitors, the industry and sector averages. Then there is the 5.6% dividend the company offers. And sales of the Lincoln Navigator in January 2018 saw a 97% increase when compared to Navigator sales in January 2017. Ford is having trouble keeping up with demand for the Lincoln Navigators, even the higher priced models. The company is expected to increase production of the Expedition and the Navigator to meet the growing demand.
What to Hate About Ford
Analyst expected revenue growth of 0.90% for Ford in 2018, nothing to really write home about.
What We Think of Ford as an Investment
We believe from our review of Ford, if the company is able grow revenue slightly or stay flat over the next five years, and cut $14 billion of expenses as planned, the stock will trade in the $15 to $17 range. If you're looking for a high flier, Ford isn't it. Any investor in Ford will likely make more from the dividend than from capital gains over the next three to five years.
General Electric (GE)
Around since the 1880's and trading publicly since the 1890's, GE is one of the 12 original Dow Jones Components. General Electric has been able to navigate the Great Depression, the dot-com bust, 9/11, and the Great Recession, but it is having a hard time thriving during the current nine year bull run.
Where the Stock is Now
Currently GE trades at $15.05per share. The stock has lost over 50% of it's value since hitting $31 per share in early 2017. GE was the worst performing stock of the Dow Jones Industrial Average in 2017, not a title any company really wants to hold. GE currently has a dividend yield of 3.19%.
Bad management is to blame for GE's current situation, under former CEO Jeff Immelt the company spent unwisely, mismanaged assets, made questionable deals, and may have allowed some questionable accounting under his watch. Then there is the reduction in dividend which occurred a few months ago. If you believe that it is darkest before the dawn, GE might be your type of investment, because it's pretty dark.
GE operates in many different markets, and they're not just a jack of all trades, GE has actually mastered a few the markets they participate in. GE Power is a world leader in power generation, and GE Aviation is a world leading provider of aviation jets. In the fourth quarter, GE reported that GE Healthcare is stable in the U.S. and in European markets, but experiencing double digit growth in emerging markets. Besides the three just listed there are nine other divisions with in GE, and not all of them are performing like well oiled machines.
Catalyst and Future Events That Could Move GE's Stock
A possible breakup of GE could unlock the value of GE and really reward the shareholders. Wall Street Analyst have pushed for a breakup for years, but it appears it could be happening soon according this CNBC article. If GE decides not to break the company up, divesting could help increase share holder value. Since emerging from the Great Recession GE has already spun off its financial arm Synchrony Financial (SYF) and sold its appliance division. Next up could be GE Transportation and GE Lighting, GE has been exploring a sale of both divisions. Then there is new CEO John Flannery, who successfully turned around GE Healthcare prior to becoming CEO of GE. Flannery believes that GE has too many resource intensive operations with few prospects and that core business focus and cutting cost is the way to unlock GE's value for its shareholders.
What to Love About GE
Power, Aviation, and Healthcare. If John Flannery and GE can properly manage these assets, this could be the rebirth of a great company.
What to Hate About GE
A pending SEC investigation into GE's accounting practices could end with a hefty fine. There is also the dividend cut, the high amount of long term debt along with a $31 billion pension deficit. There is also the underperforming divisions that GE will need to decide what to do with.
What We Think of GE as an Investment
GE is a really big fixer-upper, but it could be the nicest house on the block with lots of work and time. Investors looking for an investment to brag about at the 2018 Christmas party will want to stay clear. The reorganization needed by GE to get the company on track will take years. However, if you're looking for an investment that will be considered a steal in five years, GE may be what you're looking for. We believe the company will continue to trade lower, and will flirt with $9 per share before making any significant move higher. However with speculation that the company will announce plans to break it self up this Spring, waiting for GE's stock to fall to $9 is a gamble.
AT&T is another multinational conglomerate that has been around for over 100 years. Currently AT&T is the world's largest telecommunications company, the second largest provider of mobile telephone services and the largest provider of fixed telephone services in the U.S.
Where the Stock is Now
AT&T trades at $37.14 at the time of this writing. High speed internet via cable and cell phones haven't been kind to AT&T. The more popular high speed internet became the more AT&T's stock would drop, then add people moving to cell phone's as their primary and only phone and that became another obstacle for AT&T to deal with. Eventually AT&T got into the cable and internet business and the company has been making strides to adapt old AT&T to new times. AT&T's current dividend yield is 5.41%.
Revenue growth for 2018 isn't expected, Yahoo Finance has sales growth for AT&T at -0.30% for 2018. Then there is the debt, the company ended 2017 with over $100 billion in debt, and with interest rates rising this could set the company back if not managed properly.
AT&T isn't the only phone service in town, they have competition every where and the service isn't seen as superior when compared to its competitors. AT&T is also in the cable business and more and more people are walking away from cable. Cord cutting is still a thing, and companies like Netflix, Hulu, Amazon Prime, YouTube, and others are making the decision to ditch cable and the hefty subscription cost easier than it ever was.
Catalyst and Future Events That Could Move AT&T's Stock
The acquisition of Time Warner is a catalyst that could really move the stock price up if the deal goes through. Also, AT&T's push into 5G could bring new customers if they are able to establish a reliable 5G network before their competitors
What to Love About AT&T
AT&T recently reported record 4th quarter revenue of $41.7 billion. Also the company is growing internationally showing 16% growth in international markets during the quarter when compared to Q4 2016. AT&T also reported improvements in Mexico and 139,000 added DirectTV subscribers in Latin America. AT&T has a dividend yield of over 5% and has raised its dividend for more than 30 consecutive years. What we love most about AT&T though is the proposed Time Warner acquisition.
What to Hate About AT&T
There is Department of Justice (DOJ) challenge of the AT&T and Time Warner deal. Because we don't specialize in issues involving the DOJ we can only go by what we've read, and for every article that feels the acquitistion will go through, there is another article that isn't as confident. There is also the rising debt at AT&T that is cause for concern. As stated earlier at the end of 2017 AT&T had $144 billion in debt, and the company plans to acquire Time Warner for $85 billion. Between 2013 and 2017, AT&Ts debt has increased 4 out of the 5 years. Rising debt and rising interest rates will become a heavy burden to bear, especially if the acquisition of Time Warner doesn't produce the results AT&T hopes.
What We Think of AT&T as an Investment
Traditional telephone companies that rely on the sale and service of mobile phones will be put out of business in several years by technological developments. For companies like AT&T the key to surviving will be providing an array of services and content, this is why we applaud the proposed acquisition of Time Warner. It signals to us that AT&T understands it's best future is the one where the company is diversified. Verizon came to this realization several years ago and began acquiring content companies, AOL and Yahoo. I know those aren't the splashiest names out there, but it was a start. AT&T is similar to Ford in that you'll likely receive more from the dividend than you will from any capital gains. However of the three companies discussed here, AT&T has the best outlook in our opinion.
There are a lot of excellent investments out there after the recent stock market pullback. We've isolated Ford, GE, and AT&T because of their price, their dividend, and the belief that these companies will excel over the next five years.
Thank you for reading. If you have any questions or comments don't hesitate to reach out on twitter @sevillereport or email us here.
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