Based in Dearborn, Mich., a suburb of Detroit, the company has increased its global portfolio in the last two decades. In addition to the Ford and Lincoln brands, it owns a small stake in Mazda in Japan and Aston Martin in the UK. In 2008, Ford sold its stake in Jaguar and Land Rover to the Indian manufacturer TATA Motors (TTM) . In 2010, Volvo was sold to Geely Automobile. Ford has expanded into the global markets, getting a foothold in South America, Asia Pacific and the Middle East, but it lost its strong position in the U.S.
After losing its market share for ten consecutive years, the company decided to cut costs. In the last three years Ford cut 400,00 jobs and closed seven factories. The company was in a dire condition in 2006, and the management had to make some hard decisions. Management decided to mortgage everything, including assets, plants, office property and patents for $23 billion to save the company. The management also decided to give the company new strategic direction by investing more in new technologies to improve quality, safety and emissions of the vehicles. Significant investments were made for technology innovation. The focus has turned from gas guzzling machines to more fuel efficient vehicles. As a part of this strategy, Ford decided to venture into the hybrid cars market.
Since the last three years, the U.S. automobile industry has been recovering. Ford's biggest U.S. competitors are General Motors (GM) and Toyota Motors (TM). Ford has about 17% market share in the U.S. and about 8% in Europe. As of last year, Ford earned about $20 billion; its biggest amount since 1998 and the second biggest in its history.
Ford stock has been performing well. Most of the fundamental ratios are close to industry averages, and in some cases better than the competitors. The valuations make Ford a relatively better investment, as it supports a higher EPS and a lower P/E compared to its major competitors.
Ford Motor stock was trading for as low as $6.45 back in January 2008. It made a remarkable recovery and went straight up to $18 in 2011, a remarkable gain of more than 180%. The current 52-week range for the stock is $9 to $14. At current prices, Ford is trading about 25% lower than the 52-week high.
Looking at the company's financials, one can easily see that the stock is primed for a big move in the future. The current trailing P/E ratio stands at 2.22, a lot lower than the industry. Based on a modest earnings growth estimate of 6%, the PEG ratio for Ford stands at 0.36. This is an attractive investment from the valuation perspective. Stock has gained about 5% in the last three weeks. I think the momentum will keep going, as we are approaching the summer season.
P/CF, P/S and P/FCF are all below industry average at 2.64, 0.30 and 8.55, respectively. Operating margin and profit margin were 5.05% and 14.06% for the last year. The stock has a relatively higher beta at 2.36 making it a little volatile. Debt to Equity ratio stands at 6.05. Morningstar rates Ford's debt at BBB-, better than the debt rating of many countries. The stock has proven to be an attractive investment for institutions.
Sales for the first quarter of this year fell due to the economic turmoil in Europe, as Ford has established a very strong market in Europe through its quality products. The recent quarterly net income was $1.4 billion, 45% less than the same quarter last year. A major reason for lower net income was the increase in the tax rate for the company, which quadrupled from a year ago. The margin improvement in the North American market was also overshadowed by poor performance in the European markets. European operations went from $293 million operating profits to $149 million pretax operating losses. Excluding taxes and special items, the company earned 39 cents per share. North American operations produced $2.31 billion, the best ever since 2000, and almost 19% more than the previous year. Current cash reserves for the company stand at $23 billion.
The two main competitors of the Ford Motor Company, Toyota and GM, also have suffered from the recent financial crises. GM's operating margin and net margin stand at 3.8% and 3.6%, well below the industry average. The P/E and P/S ratios for GM are attractive, at 4.9 and 0.2, respectively. GM is trying to reduce pension liability of about $134 billion, by offering one-time settlements to 42,000 retirees. This step will bring down the pension obligation by $26 billion. Currently, the financial status of GM's pension plan is underfunded by $25 billion.
Toyota Motors faced a tsunami in Japan and floods in Thailand, affecting the production of the vehicles, and bringing down the profits. Toyota sales are expected to recover in the next year with new products and rebuilding inventories. Toyota is also suffering from a stronger yen, making its earnings less attractive. Toyota expects to earn an operating profit of 200 billion yen ($2.6 billion), 57% less than the last year. The P/E ratio for Toyota is 51.3, worryingly higher than the industry average of 9.2. Toyota is also struggling with operating margin, net margin and ROE figures, which stand at .9%, 1.1% and 1.9%.
The recent major structural changes and bold decisions from the management have helped the company regain some market share. I have personally observed a price hike in Ford's recent product lines. That is a good thing for the investors, as Ford's margins will improve due to higher prices. Recently, Ford moved into the electric car territory. I think that is a smart move, as the oil prices keep going up.
A forward P/E ratio of six makes Ford a very nicely valued stock. Ford is still a recovering company, and it provides a great opportunity for investors to reap some healthy benefits. The current price is well below the peak price in 2011. Recent cost saving measures, marketing and union contracts will help the company regain its market share. Ford is trading significantly lower than its 52-week highs, which suggest a wide margin of safety.
I think the stock has a strong upside potential. Currently, the stock is trading near the support level and moving towards the resistance level, but it still has substantial upside potential. I just purchased some for my portfolio; therefore you better hurry if you want to enjoy some strong profits along my side.
About the author:
Investment philosophy is to first determine the maximum loss, and invest accordingly. Like many value investors, we prefer to invest in stocks with the highest dividend yields, and highest EPS growth potentials. Telecommunication and energy stocks in emerging markets are among the favorites.
Based on extensive quantitative analysis, in any market, going short is risky. Statistical analysis shows that technical indicators work only if they are strong enough to convince the majority of the investors. Do not buy a stock at the top, do not sell a stock at the dip.