This Auto Maker Looks Like a No-Brainer Trade

Melvin Pasternak's picture

Monday, November 8, 2010 - 8:51am

by Melvin Pasternak

There are many things to like about the world's fourth largest automaker.

For starters, it was the only major U.S. automaker able to skirt bankruptcy during the financial crisis. And due to aggressive cost cutting, it is on target to have one of its strongest years ever.

In the wake of Toyota's (NYSE: TM) ongoing vehicle recalls, customers are understandably attracted to this car company, which has an award-winning safety record.

As a result, October 2010 sales increased +15.4% compared with a year ago.

Of course, if you haven't already guessed, I'm talking about Ford Motor Co. (NYSE: F).

In addition to strong fundamentals and a compelling valuation, the technicals for Ford shares look very enticing.

Take a look at the chart below to see what I'm talking about...

Currently trading just under $16, Ford appears to be on a major growth trajectory. The shares are on a major uptrend since hitting a low of $1.50 in February 2009, climbing more than +980% to date!

This past November 1st trading week, Ford bullishly broke a multi-month ascending triangle, formed by the major uptrend line and important resistance near $14.57.

The stock busted through resistance and pierced the upper Bollinger band, which currently intersects at $15.20.

According to the measuring principle for a triangle, calculated by adding the height of the triangle to the breakout level, Ford should reach an initial price target of $19.25 ($14.57-$9.89=$4.68; $4.68+$14.57=$19.25).

In late September, the 10, 20, 30 and 40-week moving averages all began to converge around each other. Now, the 10-week moving average has risen above the 20, 30 and 40-week moving averages -- a bullish sign.

The lower Bollinger band, which intersects near $10, marks a shelf of historical support dating from January 2010.

The indicators are bullish. Since June, relative strength index (RSI) has been in an uptrend. It is currently well above its uptrend line and rising. At 73, it has just become overbought; however, strong stocks can become and stay overbought for long periods.

MACD is on a buy signal. The MACD histogram is rising in positive territory.

Stochastics, although overbought, has not yet given a sell signal.

In late October, the Michigan-based automaker reported profits for the sixth straight quarter.

Third-quarter 2010 revenue was $29 billion. Including the sale of the Volvo brand, revenue would have been $30.7 billion. In the year-ago quarter, revenue was $30.3 billion.

Due to strong pick-up truck sales, analysts expect Ford's full year 2010 revenue will inch up +0.8% to $119.3 billion, compared to $118.3 billion last year, despite weak sales in Europe. By 2011, analysts project revenue will increase a further +4.2% to $124.3 billion.

The earnings outlook is also bright.

In the most recently reported third-quarter, earnings increased +48.3% to $0.43 per share, compared with $0.29 in the year-earlier period. Growth was driven by higher profit margins on both cars and trucks.

Due to aggressive cost cutting, Ford is on target to have one of its strongest years ever. Analysts project full year 2010 earnings to increase to $2.03 from a flat $0.00 last year. By 2011, analysts expect earnings will rise by a penny, to $2.04.

In addition to growth potential, Ford is also attractively valued.

Ford's trailing price-to-earnings (P/E) ratio is 9.7. By comparison, competitor Honda Motor Co (NYSE: HMC) has a slightly higher trailing P/E of 9.8, while Toyota Motors has a trailing P/E of 19.2.

Ford also leads its peers from a price-to-sales (P/S) standpoint. Ford has a P/S of 0.4, while HMC and TM have slightly higher P/S ratios of 0.6 and 0.5, respectively.

Ford is also rigorously working to reduce debt. Current debt is around $22.8 billion, down from $33.6 billion a year-ago. By the end of 2010, the company expects to have equal amounts of cash and debt, which bodes well for its future operations.

Action to Take--> Given Ford's solid growth outlook, attractive valuation and strong technicals, I would go long on the automaker by purchasing the stock and setting an initial target price of $19.25, as calculated by the measuring principle, mentioned above. I recommend using a stop-loss of $13.22, just below the current intersection of the 10-week moving average.

Based on Friday's closing price of $16.21, the risk reward ratio is 1.02:1, and traders stand to make +18.8% from this trade.

Melvin Pasternak does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.