In this article, let's take a look at Ford Motor Co. (F, Financial), the second-largest U.S. producer of cars and trucks, which is immersed in a highly cyclical industry. Ford Motor Co. manufactures automobiles under its Ford and Lincoln brands.
Economies of scale
The company puts more emphasis on quality. It 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.
By 2016, the company expects most of its global production to come from its core platforms: five global and four regional. This reduction in the number of platforms will make that the firm can switch production faster while reducing costs due to economies of scale, saving billions of dollars in development costs.
Other models
Models such as Fiesta, Focus and Fusion have good impact on the market. These fuel-efficient vehicles will be perfect to compete with Toyota (TM, Financial) and Honda (HMC, Financial). 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.
Dividend yield
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 3.35%, 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, revenues declined 1.36 but earnings per share increased by 6.7% in the most recent quarter compared to the same quarter a year ago. During the past fiscal year, the company increased its bottom line. It earned $1.75 versus $1.42 in the previous year. For the next year, Wall Street is expecting a contraction of 36.2% in earnings ($1.12 versus $1.75).
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 | 27.64 |
| GM | General Motors Co. | 8.04 |
| TM | Toyota Motor Corporation | 13.27 |
| Â | Industry Mean | 10.14 |
The company has a current ratio of 27.64% which is higher than the one exhibit by General Motors Co. (GM, Financial) and Toyota Motor Corporation. 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.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 8.8x, trading at a discount compared to an average of 15.2x for the industry. To use another metric, its price-to-book ratio of 2.11x indicates a premium versus the industry average of 1.43x while the price-to-sales ratio of 0.40x is below the industry average of 0.62x. 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 $20,727; that is a 15.7% compound annual growth rate (CAGR).
Final comment
Although the industry is full of strong competition, several growth catalysts make me feel bullish on this stock. As outlined in the article, Ford continues to raise its dividend and this is very attractive for dividend investors.
In this opportunity, I would recommend fundamental investors to consider this attractive option for their long-term portfolios.
Hedge fund gurus like James Barrow (Trades, Portfolio), Ken Heebner (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) added this stock to their portfolios, as well as HOTCHKIS & WILEY.
Disclosure: Omar Venerio holds no position in any stocks mentioned
