The smartest way to play a resurgent U.S. housing market? Buy Ford Motor Co.
The auto maker has close ties to the housing market because of its heavy reliance on pickup trucks, a vehicle that has more to do with construction activity than commuting or pleasure driving.
As optimism grows about a recovery in the U.S. housing market, demand for pickups has been climbing steadily. One of the prime beneficiaries is Ford’s F-Series line, a traditional workhorse for contractors and tradespeople. Sales of the vehicles reached 645,300 in 2012, marking the third successive year of gains.
The housing market is an important driver of that rebound. U.S. home starts rose 24 per cent last year, through November, reaching a four-year high.
Sales, prices and construction activity showed so much promise in 2012 that home-building stocks – long depressed since the implosion of the U.S. housing market – returned as stock market darlings last year.
The S&P 500’s home-building index, which consists of PulteGroup Inc., D.R. Horton Inc. and Lennar Corp., rose 103 per cent in 2012, making it the second-best performer among 154 industry groups in the S&P 500.
Ford, though no slouch, rose a comparatively tame 20 per cent, much of which was merely a rebound from the 36-per-cent decline in 2011.
If home builders are already reflecting rampant optimism about the housing market, Ford is just beginning to feel the effects of the recovery.
Sales of pickup trucks, even after their recent surge, are still at 1994 levels, well off the highs seen during the housing market’s glory years, suggesting that there is plenty of rebounding still to come.
A further pickup in pickups could have dramatic effects on the bottom lines of both Ford and rival General Motors Co. According to Bloomberg News, Detroit auto makers control 93 per cent of the U.S. pickup truck market.
The Detroit-based auto makers generate operating profits of as much as $10,000 on each pickup they make, according to analysts – multiples of the profits they generate on small and mid-sized cars. Ford’s F-series line accounts for an astounding 90 per cent of the company’s global auto profits, putting the auto maker’s stock in good position to out-zoom the home builders as a rebound in construction encourages contractors to buy new trucks.
To be sure, the home builders have one point in their favour: Despite the triple-digit returns of last year, they remain more than 50 per cent below their highs in 2005, implying that their rebound has further to go.
But Ford has the horsepower to do even better.
For one, its past isn’t tainted by a bubble. Home builders might take years to reach the highs they hit at the peak of the U.S. housing mania, when the real estate market was driven by easy credit, unrealistic expectations and relaxed regulations. Not so with auto makers, which never benefited from a sales boom of similar proportions and so may be better positioned to challenge their previous highs.
Valuations speak volumes. Ford’s trailing price-to-earnings ratio is less than 11, compared to an average PE of 36 for home builders.
And while home builders pay next to nothing in dividends, Ford is becoming a dividend star. It announced on Thursday that it will double its quarterly payout to 10 cents (U.S.) a share, giving the stock an attractive yield of 2.9 per cent and providing a clear signal from management that the company’s financial health is solid.
If the housing market continues to improve, Ford will likely boost its dividend even more – making it an unusual way to benefit from all those new U.S. subdivisions.