Pat Dorsey, the director of equity research at Morningstar, and author of two books on investing: The Five Rules for Successful Stock Investing and The Little Book That Builds Wealth recently explained why he is bullish on Ford.
Dorsey right away mentioned that he knows why people are bearish on Ford. Mainly because it is in a business that requires lots of capital expenditures and has been losing market share for years.
First, Dorsey points out that Ford is saving $1 billion per year in cash because it transferred its health care obligations for retired workers to Voluntary Employees Benefit Association. Dorsey also mentioned that its manufacturing process has become more efficient, and its cost structure has come down. Ford is finally beating competitors in terms of appeal to customers. In some quality surveys Ford is beating Toyota, and Honda. Ford is actually increasing prices on its cars.
Dorsey expects earnings to be between $2.50-$3.50 a share in several years. Right now the company is trading at $13 a share. With an 8X multiple of earnings and assuming earnings of only $2.50 per share fair value is $20 per share.
With Ford I think the story has materially changed. You look at the kind of margins the Company can generate going forward. We think earnings per share could be in the neighborhood of $2.50 to $3.00 within a few years time, which actually makes the current $12.50, $13 quote look pretty cheap. Even if you put a pretty low multiple on, say, $2.50 in earnings, you get a share price that’s quite a bit higher than $13 per share. In fact, our fair value estimate on Ford is $20 per share.
It is interesting to note two gurus who seem to agree with Dorsey.Ford makes up over 10% of [url=http://www.gurufocus.com/StockBuy.php?GuruName=Ken+Heebner]Ken Heebner[/url]’s portfolio and 2.5% of Ronald Muhlenkamp’s portfolio.
Below is the video:
Disclosure: No positions in any companies mentioned.
http://www.valuewalk.com/
Dorsey right away mentioned that he knows why people are bearish on Ford. Mainly because it is in a business that requires lots of capital expenditures and has been losing market share for years.
First, Dorsey points out that Ford is saving $1 billion per year in cash because it transferred its health care obligations for retired workers to Voluntary Employees Benefit Association. Dorsey also mentioned that its manufacturing process has become more efficient, and its cost structure has come down. Ford is finally beating competitors in terms of appeal to customers. In some quality surveys Ford is beating Toyota, and Honda. Ford is actually increasing prices on its cars.
Dorsey expects earnings to be between $2.50-$3.50 a share in several years. Right now the company is trading at $13 a share. With an 8X multiple of earnings and assuming earnings of only $2.50 per share fair value is $20 per share.
With Ford I think the story has materially changed. You look at the kind of margins the Company can generate going forward. We think earnings per share could be in the neighborhood of $2.50 to $3.00 within a few years time, which actually makes the current $12.50, $13 quote look pretty cheap. Even if you put a pretty low multiple on, say, $2.50 in earnings, you get a share price that’s quite a bit higher than $13 per share. In fact, our fair value estimate on Ford is $20 per share.
It is interesting to note two gurus who seem to agree with Dorsey.Ford makes up over 10% of [url=http://www.gurufocus.com/StockBuy.php?GuruName=Ken+Heebner]Ken Heebner[/url]’s portfolio and 2.5% of Ronald Muhlenkamp’s portfolio.
Below is the video:
Disclosure: No positions in any companies mentioned.
http://www.valuewalk.com/
