Ford (F, Financial) was reported Saturday to recall 52,600 F-250 pickup trucks sold in the U.S. and Canada because the vehicles could roll after the driver moves the automatic transmission lever into the park position.
(Ford)
According to Reuters, this recall comes after last week's recalls for 211,000 Ford vehicles with potentially faulty side door latches, and another 230,000 Ford vehicles that presented a fire risk in the engine compartment.
Earnings performance
In January, the $46.3 billion Michigan-based carmaker delivered its full-year fiscal 2016 results. Ford reported a 1.5% sales increase to $151.8 billion and a disappointing 37.7% profit reduction to $4.6 billion – a 3% profit margin compared to 4.9% in 2015.
The marked profit reduction in 2016 was brought by some $3.6 billion in special items expenses. This compares to Ford’s $698 million charge in 2015.
In review, $2.99 billion of the special items expenses were in relation to year-end pension and other postretirement employee benefits remeasurement losses among others.
“We achieved a solid 2016 net income of $4.6 billion as well as an adjusted pretax company profit of $10.4 billion, which was our second best ever – building on the all-time record we had set the year before. This underscores the substantial progress we are making in expanding our business to be an auto and a mobility company. This year we’re focused on building on our strengths, transforming underperforming parts of our business and investing in the emerging opportunities that will provide even more profitable growth in the future.” – Mark Fields, president and CEO
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Total returns
Ford has underperformed the broader Standard & Poor's 500 index in the past half decade. According to Morningstar data, the car company delivered a total 8.96% loss for the past year compared to S&P 500’s 17.2% gain. In the past five years, Ford returned 2.8% compared to the index’s 13.3%.
Valuations
Ford is undervalued compared to its peers. According to GuruFocus data, Ford had a trailing price-earnings (P/E) ratio of 10.2 times vs. industry median 17.8 times, a price-book (P/B) value of 1.6 times vs. industry median 1.67 times and a price-sales (P/S) ratio of 0.31 times vs. industry median 0.8 times.
Ford had 5.17% trailing dividend yield with a 52% payout ratio.
In average analyst expectations for fiscal 2017, Ford had forward P/S and P/E ratios of 0.33 times and 7.32 times.
Ford
According to filings, Ford was incorporated 113 years ago to produce and sell automobiles designed and engineered by Henry Ford.
Ford is a global automotive and mobility company with the core business that includes designing, manufacturing, marketing and servicing a full line of Ford cars, trucks and SUVs as well as Lincoln luxury vehicles.
In 2016, Ford generated 61.6% or $93.4 billion of total sales in the U.S., followed by 6.6% each in the United Kingdom and Canada, 4.8% in Germany and 20.4% from other countries.
Ford reported four operating segments: Automotive, Financial Services, Ford Smart Mobility LLC and Central Treasury Operations. Ford Smart Mobility LLC and Central Treasury Operations are combined into one All Other segment.
(10-K)
Automotive
Ford’s Automotive segment primarily includes the sale of Ford and Lincoln brand vehicles, service parts and accessories worldwide, together with the associated costs to develop, manufacture, distribute and service the vehicles, parts and accessories.
Further, the division includes five regional business units: North America, South America, Europe, Middle East & Africa and Asia Pacific.
In 2016, Automotive sales grew 0.7% to $141.5 billion or 93.2% of total Ford sales. The segment also delivered a pretax margin of 6.7% compared to 6.8% in 2015.
(10-K)
Financial Services
The Financial Services segment primarily includes Ford’s vehicle-related financing and leasing activities at Ford Motor Credit Co. LLC.
In 2016, Financial Services sales grew 14% to $10.3 billion or 6.8% of total Ford sales. The segment also delivered a pretax margin of 17.8% compared to 22.6% in 2015.
(10-K)
All Other
According to Ford, the All Other division is a combination of two operating segments that did not meet the quantitative thresholds in this reporting period to qualify as reportable segments.
All Other consists of Central Treasury Operations (formerly Other Automotive) and Ford Smart Mobility LLC.
The Central Treasury Operations segment is primarily engaged in decision making for investments, risk management activities and providing financing for the Automotive segment.
Ford Smart Mobility LLC, meanwhile, is a subsidiary formed to design, build, grow and invest in emerging mobility services. Designed to compete like a startup company, Ford Smart Mobility LLC will design and build mobility services on its own and collaborate with startups and tech companies.
In 2016, All Other sales improved to $1 million compared to nil in 2015. The segment also delivered pretax losses of $867 million compared to losses of $796 million in 2015.
Sales and profits
(10-K)
In the past three years, Ford generated sales and profit growth and margin averages of 1.1%, 126% and 2.9%.
Outlook
(10-K)
Ford expects its fiscal 2017 operations to be generally lower than 2016, driven by investments in emerging opportunities.
(10-K)
As per Ford’s Automotive segment, which generated most of the company’s business, the segment is further subdivided into different regional business units as shown in the image.
Ford expects its profits in North America and Europe to be lower than 2016, projecting improvements in results in South America, Middle East & Africa and Asia Pacific. Results for Ford Credit and All Other are expected to be lower than 2016.
Cash, debt and book value
As of December, Ford had cash and cash equivalents of $15.9 billion and $29.2 billion in debt payables within one year and long-term debts resulting in a debt-equity ratio of 4.9 times compared to 4.6 times.
Ford also had a book value of $29.3 billion in 2016 –Â a 1.85% growth from 2015.
The car company had total underfunded pension plans of $8.9 billion in 2016 compared to $8.2 billion in 2015.
Cash flow
(10-K)
In 2016, Ford grew its cash flow from operations by 2.24% to $19.8 billion. Capital expenditures were $7 billion leaving the car company with $12.8 billion free cash flow compared to $8.97 billion in 2015.
(10-K)
*Free cash flow is defined as cash flow from operations minus capital expenditures.
Adding operating leases and finance receivables to capital expenditures resulted in negative net cash flow. Meanwhile, Ford also set aside $2.07 billion in equity and debt securities purchases net sales and maturities.
(10-K)
Conclusion
Ford demonstrated steady business growth in its recent fiscal year operations, especially its financial services business. However, the company does not expect to have the same business growth but evidently lower this fiscal 2017.
Ford also became a little more leveraged in 2016 while also carrying a good amount of underfunded pension liabilities. Ford exhibited steadily improving free cash flow in recent years.
(Ford Share Price and Price-Sales Ratio, GuruFocus)
In February, Jefferies and Barclays both upgraded their outlooks on Ford shares to hold and overweight. Twenty-two analysts had an average target price of $13.18 or 13% upside from $11.64, the share price at the time of writing.
Applying three-year P/S multiple average, 1.5% growth rate and a 20% margin would give a value of $45.2 billion or $11.4 per share –Â keeping the same amount of shares outstanding.
Ford is a hold.
Disclosure: I do not have shares in the company mentioned.
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