With lots of attention focused on Tesla (TSLA, Financial) and Nikola (NKLA, Financial) these days, investors might forget about the former big three of American auto manufacturing. Ford Motor Co. (F, Financial) is one of them and has been trying to remake itself over the past decade. The need for change will come as no surprise to anyone who has followed its share price:
Yet, this is a company with a fat wallet and lots of plans for the next half-decade and beyond. According to the to second-quarter 2020 earnings release, Ford ended the quarter with $39 billion in cash. It expects to have a cash balance of at least $20 billion through the second half, even if global demand drops off or the pandemic forces plant closures. While it has been growing its debt load, it did pay off $7.7 billion of its $15.4 billion credit facility in the quarter.
Moreover, the company believes that a major corporate redesign underway since 2018 is now paying off. In the words of Chief Financial Officer Tim Stone, "You're seeing us fix things that held us back in the past, accelerate in areas like commercial vehicles and SUVs, and set ourselves up for growth in connectivity, electrification and autonomous vehicles."
Ford plans to launch three "significant" products in the second half of the year, although the new products are not expected to have an effect on fourth-quarter results. Those products are an all-new F-150 pickup, the all-electric Mustang Mach-E and a new Bronco Sport. In the company's words, they are the "keys to accelerating transformation, growing profits."
The company has been criticized for being too slow on electrification, but it appears to be catching up now. In the next two years we can expect:
- The Territory SUV BEV, which is already on the road in China.
- Escape and Kuga plug-in hybrids.
- The F-150 PowerBoost hybrid.
- All-electric models of its two most important vehicles, the F-150 and Transit.
- Electric Lincoln cars.
Autonomous, or self-driving, vehicles will also be part of Ford's future through its subsidiary Argo AI. In 2017, Ford invested $1 billion in Argo, a company founded by former Google (GOOG, Financial) (GOOGL, Financial) and Uber (UBER, Financial) managers, and following a recent investment by Volkswagen (XTER:VOW3, Financial), it is now valued at $7.5 billion.
Volkswagen is much more than a co-investor in Argo, though. In June, Ford and Volkswagen finalized a global strategic alliance. In Ford's description of the deal, they are "leveraging complementary strengths across an expected combined 8 million commercial and electric vehicles, and midsize pickup trucks. The alliance emphasizes innovation and choice for their respective customers of commercial vehicles and high-performing EVs".
In another move to bolster its often-criticized global operations, Ford set up a joint venture with Indian automaker Mahindra & Mahindra Limited (NSE:M&M).
It looks like a promising line-up of both products and partners, but of course the competition is also investing heavily and moving aggressively.
Ford also needs to find some stability at the top of the organization. In early August, the company announced that its fourth CEO since the 2008 recession, James Hackett, would be leaving. He is to be replaced by Chief Operating Officer Jim Farley at the beginning of October. The parting was said to be amicable, but the continuing turnover is concerning.
And this is not Ford's first transformation. Back in 2006, then CEO Alan-Mulally pitched and received a $23 billion loan that was to be used to refocus the company. As it turned out, that backstop made Ford look good when the financial crisis hit in 2008. Its Big-3 rivals, General Motors (GM, Financial) and Chrysler (now Fiat Chrysler Automobiles (FCAU)), were forced to go cap-in-hand to the federal government to beg for loans.
Some transformation did occur; it invested heavily in smaller cars with fuel-efficient engines and in lighter pickups. It also discarded several brands that had been acquired over the years but did little for profitability. It focused on its most profitable brands, the F-Series and Super-Duty trucks. However, the transformation was not as successful as hoped; for example, the price of gasoline plunged with the recession and demand for small cars was dampened.
Fundamentals
There are also concerns about Ford's financial fundamentals. Starting with the low rating for predictability, 1 out of 5, this 10-year chart of earnings per share shows why:
Ford also has a low rating for financial strength because of its debt load:
The following chart shows how the long-term debt has grown, but note that the growth of cash and cash equivalents also has been strong, generally:
According to Marion Harris, the CEO of Ford Credit, in a conference call with analysts on April 28, the company has a limit on its borrowing: "And then on dividends, the only thing I would say is that they're a function of net income and balance sheet size and leverage, and it will be what it will be. We're still continuing to target an 8 to 9 leverage."
Turning to profitability, this table shows a bleak picture:
With the exception of revenue, every line on the profitability table is negative and underperforming the vehicles and parts industry, even looking bad when compared to its own history.
With such discouraging data in the financial strength and profitability tables, one might think the stock would be deeply undervalued. However, the GuruFocus Value calculator gives it a "Modestly Undervalued" rating:
The stock is modestly undervalued because it has recovered from the March low when it hit the $4 mark. Indeed, the share price now is 41% higher than it was when it bottomed out and that shows investors still have some confidence at least in Ford's future.
Its price-earnings ratio is 8.59, well below the industry median of 13.47. There is no PEG ratio because as we saw in the profitability table, Ford has had negative Ebitda over the past three years (the ratio uses five years of past Ebitda results). And, because it has a low rating for predictability, any results from the discounted cash flow calculator will be unreliable.
The dividend might have been something to cheer about because it was well above the S&P 500 average, but it was canceled in March:
Ford's board of directors gave the dividend a big push in 2015 and then held it level until this year, when it was suspended. At the same time, the company also shut off its share repurchases. Stone explained:
"Now let me turn to automotive liquidity and provide a little more color on some of the strategic actions we've taken since March to provide additional flexibility during this challenging time. In March, we suspended our regular dividend, which equates to $2.4 billion per year. We also suspended our antidilutive share repurchase program, which was $0.2 billion last year."
Gurus
The investing giants took notice when the share price tumbled in March, but since then their appetites have waned:
Eight of the gurus followed by GuruFocus have holdings in Ford. The largest belongs to Richard Pzena (Trades, Portfolio) of Pzena Investment Management, with 48,746,968 shares at the end of the second quarter. That was good for a 1.23% stake in the company. During the quarter, he reduced his holding by 4.6%.
Pioneer Investments (Trades, Portfolio) owned 4,951,894 shares after a big boost of 66.38%, while Stanley Druckenmiller (Trades, Portfolio) of Duquesne Capital Management established a new holding in the second quarter and now own 497,500 shares.
Conclusion
Ford has big plans and new partners, but will execution match the vision? This company, with more than a century of history behind it, has stumbled along since the financial crisis of 2008. And while one good quarter does not mean a turnaround, recent results are encouraging.
It has lots of cash, so there is no danger of falling into a financial abyss, but it will need to see consumer and commercial excitement for its new vehicles, especially the electric F-150s and Transit vans.
In my view, this is only a stock for growth investors who expect the share price to keep recovering. Ford will be of no interest to income investors since it now has no dividend and value investors will take note of the debt load and lack of a solid margin of safety.
Disclosure: I do not own shares in any of the companies named in this article.
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