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Many Reasons to be Bullish on Ford

July 22, 2014 | About:
ovenerio

ovenerio

5 followers

In this article, let's take a look at Ford Motor Co. (F), the second largest U.S. producer of cars and trucks, which is immerse in a highly cyclical industry.

Better Cars

Ford focuses on making better cars so the quality is playing an important role. People buy this brand because they want to have the car and not only because of heavy incentives. For the future, the big challenge is to keep increasing share profitably, as the company did last year, when it gained the most share of any automaker.

Other Challenge

Another key challenge is to improve economies of scale. The company plans to reduce its platforms from 27 in 2007 to 9 in 2016 (5 global and 4 regional), searching for faster production and better reduced costs, saving billions of dollars in development costs.

Fuel-Efficient Models

Models such as Fiesta, Focus, and Fusion have a solid impact on the market. This moves in the same way with the switch from trucks to small cars. On the other hand, the luxury category Lincolns will make more profit than other Ford brand vehicles due to four new vehicles in the next four years.

Attractive Dividend Policy

Ford has an attractive dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 2.5%, which is quite good to protect the purchasing power, especially considering the consistency of track-record dividends payments and favorable expectations regarding dividend growth and share repurchases for the next years.

Revenues, Margins and Profitability

Looking at profitability, the revenue growth (22%) has outpaced the industry average. Earnings per share declined by 40% in the most recent quarter compared to the same quarter a year ago. During the past fiscal year, it increased its bottom line by earning $1.75 versus $1.42 in the prior year. However, I think this is not a long-term downtrend.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

F

Ford

27.12

GM

General Motors Co.

12.55

TM

Toyota Motor Corporation

12.60

 

Industry Mean

10.05

The company has a current ratio of 27.12% which is higher than the one exhibit by General Motors Co. (GM) and Toyota Motor Corporation (TM). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment, so this ROE looks very attractive. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

 

ROE (%)

Ind. Avg

S&P 500

Q1 2014

24.4

8.48

14.43

Q1 2013

33.41

2.75

13.15

Q1 2012

114.76

0.45

14.26

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 11.1x, trading at a discount compared to an average of 17.4x for the industry. To use another metric, its price-to-book ratio of 2.7x indicates a premium versus the industry average of 1.6x while the price-to-sales ratio of 0.49x is below the industry average of 0.7x. Two metrics indicate that the stock is relatively undervalued and seems to be an attractive investment relative to its peers.

As we can see in the next chart, the stock price has an interesting upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $23.679, that is an 26.5% compound annual growth rate (CAGR).

1406036006462.png

Final Comment

Despite the industry is full of strong competition, several growth catalysts make me feel bullish on this stock, so I would recommend fundamental investors to consider this attractive option for their long-term portfolios.

Hedge fund gurus like James Barrow (Trades, Portfolio), Richard Snow (Trades, Portfolio), David Dreman (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) added this stock to their portfolios.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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