Ford Motor Company (
) is the American automaker that avoided bankruptcy during the
financial collapse, and recently resumed a dividend.
-Seven Year Revenue and Income Growth: N/A
-Current Dividend Yield: 1.61%
-Balance Sheet Strength: Weak, but improving
Ford is not a dividend growth company; the dividend is small and
newly reinstated, and the company's future faces difficulties. But
the company is currently undergoing a transformation, and I believe
the company could potentially make a good long-term value pick for
investors with tolerance to risk.
This is an interesting company to analyze; I've been interested
in publishing an analysis on the value of Ford stock for a while
and now that the Ford dividend has been reinstated, I have a small
excuse to do so.
Ford Motor Company traces its history back to the beginning of
the 20th century, when Henry Ford founded the company. The company
mass produced the automobile, making it available to the general
public. Workers were paid well enough to buy the cars they
produced, and transportation across the United States and the world
was transformed. It's now the fifth largest automaker in the world,
behind Toyota (
), [[GM]], Volkswagen (VLKAF.PK), and Hyundai (HYMLF.PK).
The company has been perpetually cyclical, with high operating
costs, and so they have booms and busts of profitability. Ford and
other American automakers began having large business problems over
the last couple of decades, and things collapsed in 2008 as part of
the financial crisis.
Of the "Big Three", General Motors and Chrysler accepted tens of
billions of dollars in government bailout money, and also went
bankrupt to reorganize. Ford, headed by current Chairman William
Ford, did not receive this money, nor did they go bankrupt.
Instead, they survived via a large line of credit that they took
out before the collapse, and continued operating.
It's worth noting, however, that Ford was in favor of bailouts.
When things were less certain, they were prepared to receive
government help. In addition, they supported bailouts of their
competitors, due to the fear that if one or both of them collapsed,
there would potentially be a systemic collapse of their suppliers,
which also supply Ford with parts. Plus, Ford did receive a loan
from the Department of Energy to invest in more fuel efficient
cars, and they desired a $9 billion line of credit to fall back on
from Congress in case things worsened, and they also benefited from
the "Cash for Clunkers" government program, as well as a program
that provided liquidity for companies when credit markets dried up
during the recession. Still, Ford was able to avoid direct
necessary bailouts and bankruptcy, and has emerged as a profitable
company once again.
Sales and Profit Description
In 2010, Ford sold around 5.3 million vehicles. 2.413 million
were to North America, 1.573 million were to Europe, 838 thousand
were to Asia/Pacific, and 489 thousand to were to South
Around 92% of total revenues were from the automotive
operations, while the remaining 8% were from financial services.
But in terms of profit, 58% of profits were from the automotive
operations and a substantial 42% were from financial services.
Ford's financial services help finance their vehicles to consumers
via vehicle loans. So when they sell a vehicle, they generally
receive the profit from the vehicle itself as well as interest
profits from a loan.
Revenue, Earnings, Cash Flow, and Margins
Ford has had declining revenue and profit losses, followed by a
Ford has sold and canceled certain brands and revenue streams.
Revenue has rebounded steadily recently.
Ford has had highly erratic earnings. They were on the brink of
folding during the recession. Ford also reported losses during the
recession in the early part of the decade.
Ford Cash Flow Growth
||Operating Cash Flow
||Free Cash Flow
Operating and free cash flow were erratic over this period. Due
to the financial arm of Ford, as well as their non-cash costs of
depreciation, cash flow is usually a lot larger than net
Price to Earnings: Around 7-8 (erratic)
Price to Free Cash Flow: Around 6-7 (erratic)
Price to Book: Around 8 (erratic)
Return on Equity: over 100% (due to small book value)
The company currently has a dividend yield of 1.61%, and the
dividend payout ratio from earnings is around 10-15%.
There's no use in presenting the usual dividend table, since
they only recently started that dividend after terminating it in
2006. From the perspective of management, paying a dividend can
provide a price floor for the stock, and can say "We're here to
stay. We're ahead of our competitors."
CEO Alan Mulally has stated that, in reinstating the dividend,
the plan is to be able to pay it through economic cycles as bad as
this previous one was. Mulally has stated that the dividend may be
increased, and buybacks are on table, but that it of course depends
on numerous variables, and the prime concern is investing in Ford
Dividends vs. Dividend Growth
Another reason I analyzed Ford was to provide a strong example
regarding the difference between a large company that happens to
pay a dividend, and a true dividend-growth company.
Ford has a long, erratic history of dividends. They've paid them
over time for the most part, but with no promise of regular annual
dividend increases, and along with the occasional dividend cut or
discontinuation. This isn't income that can be relied on, and more
importantly, it shows the fundamental difficulties of the company
over the long term.
In contrast, a company that pays growing dividends each and
every year, for decades, shows reliability through recessions. It
shows the soundness of their business model, their long-term
balance between sales and operating costs, their strong and
sustained free cash flows, and more. There's no such thing as zero
risk (some companies with good dividend growth records end up
cutting a dividend from time to time), but through diversification
and by focusing on dividend growth companies, investing income can
be expected to safely grow.
Ford Balance Sheet
The balance sheet is a weak point for Ford, but one needs to go
beyond the surface numbers. I've seen people make mistaken remarks
about the balance sheets of Ford and General Electric, which have
around $95 billion and $425 billion of total reported debt,
respectively. These numbers are astounding large, (half a trillion
in debt…) and can be misconstrued.
The truth is this: for companies like these, most of the debt is
part of their financing operations rather than being used for
operating purposes, and they specifically utilize this debt. In the
case of [[GE]]; that's due to their GE Capital arm which got them
into trouble during the financial collapse, and it's mostly a
matter of borrowing money via bonds and then lending it to
businesses, kind of like a bank, except that a bank uses deposits.
In the case of Ford, it's due to their profitable financial arm.
Rather than having car buyers take out loans from elsewhere, Ford
can provide the loans. So like any financial entity, they borrow
money at one interest rate, and lend it at a higher interest rate.
This comes with its own set of risks (interest rates, consumer
credit, etc), but Ford shouldn't be viewed as relying on roughly
$100 billion in debt to keep running. Any bank, when viewed from a
debt/equity perspective, looks quantitatively terrible until one
understands how they operate; by borrowing money and then lending
that money out.
debt is around $13 billion, which is down from the over $30 billion
it was a few years ago. Ford was able to avoid a direct bailout or
bankruptcy by taking on considerable debt; enough to push them to
the brink but not over. Compared to the shareholder equity of
around $6 billion, this $13 billion is still large, but it's in the
realm of solvency. Their interest payments are under control, and
the plan as stated by the CEO is to get automotive debt down to $10
billion within a few years. They could bring the debt down more
quickly, but interest rates are currently low, and Ford needs to
invest to make sure it has an energy efficient, high quality,
technologically advanced, and consolidated/streamlined lineup of
Ford's credit rating is currently slightly under investment
grade. It has improved, and a transition to the low end of
investment grade is expected to come at some point.
The Ford Motor Company is currently undergoing a
The "Big Three" U.S. automakers were a mess. They owned so many
overlapping brands that were competing against each other within
the same company, and between companies, for the same market of
buyers. From a production standpoint, this is highly
Under Mulally, Ford has become far more streamlined. The Ford
Motor Company sold Volvo, which it owned. They also sold Land Rover
and Jaguar, to Tata Motors. In addition, the company sold off most
of its stake in Aston Martin, keeping only a small share, and also
sold off most of their stake in Mazda. The company canceled their
Mercury brand rather than sell it, after it has operated for
several decades. Before Mulally came on board, Ford sold off Hertz
car rental as well. Now, most of the focus is on two brands: Ford
Ford is their larger, more universal brand, and Lincoln is their
luxury brand which is currently being strengthened.
Ford has shifted closer to the quote originally attributed to
Any customer can have a car painted any colour that he
wants so long as it is black.
Although once understood literally; it's now just a description
of how fewer, but better, options can go a long way. Rather than
have so many overlapping brands including Ford, Lincoln, Mazda,
Aston Martin, Volvo, Land Rover, Jaguar, Mercury, and rental cars
via Hertz; just focus on Ford and Lincoln. Although Ford products
should be targeted to different regions, worldwide technical
commonality should be emphasized to keep the number of vehicle
platforms and options to a minimal, consolidated, streamlined
Here's a recent interview
of Alan Mulally exclusively for Seeking Alpha.
Here are some of the highlighted goals as stated by Mulally in
-Increase Ford global auto sales from 5.3 million vehicles to
over 8 million vehicles by 2016.
-Grow automotive operating margins from around 6% to 8-10%.
-Focus on simplicity and commonality to put 85% of global Ford
volume onto just nine platforms. Each platform will have numerous
options, such as trim levels or energy systems (petrol, diesel,
natural gas, hybrid, electric, etc), but the core platforms are
consolidated and common throughout the company.
-Instead of producing fixed operating volume, Ford will continue
to allow its production to match demand, so it can more flexibility
ride through booms and busts of demand. The aforementioned
consolidation and streamlining is key here, as well as the concept
of producing vehicles closer to where they are used.
Overall, I'm in agreement with Ford's new approach (which it
should have been doing all along), and Mulally's leadership.
The company is only selling approximately half of the number of
vehicles annually in America as it was 10 years ago, due to a
combination of the recession, lost market share, and the sale of
certain car brands. I believe that a substantial increase in car
sales is possible over the next several years, especially since the
models and brands are more consolidated, manufacturing continues to
be streamlined, and small cars are being emphasized by Mulally
since that's where the demand is.
A big fact to consider is that the average age of cars and light
trucks on the road is up to
, which is a historical record. Total American vehicle sales were
around 12.8 million in 2011, which is a small piece of the more
than 240 million vehicles on the road in the country. Even if auto
sales increased by over a million each year, the average vehicle
age won't be impacted much.
This could act as a tailwind for the company, as consumers that
were fearful to purchase a new vehicle, may eventually buy one. It
could be viewed as a backlog. In addition, Ford expects 70% of its
growth over the next 10 years to come from Asia Pacific and
Lastly, it's worth mentioning that Ford's F-150 has been the
best selling truck, and best selling vehicle, in America, for
Ford has rather large risks. Their automotive business is highly
cyclical. Their labor costs (pay, health care, and pensions) are
very high, even after the reduction due to effective negotiation.
Macro-economic factors could negatively influence the company even
if they do most things right. The profit margins from their credit
arm are heavily influenced by changing interest rates. There are
currency risks, commodity price risks, and so forth.
Lack of Economic Moat
Major car manufacturers should have moats, but in practice they
don't. First of all, there are high barriers to entry in the
market, since to produce a safe, efficient, and desired vehicle
with enough volume requires significant capital investment.
Secondly, cars are major purchases, and customers don't want to
make a mistake. If they had a brand of car they were happy with for
years, they'd be very likely to purchase that brand again rather
than risk a five-figure purchase with another company.
But decades of poor management can erode any company defenses.
When sub-par vehicles and inefficient manufacturing processes, are
, things eventually break down. A moat can hold competitors away
for years, but not decades, if not continually maintained. Ford
could one day have a moat, but currently in my view does not.
Reliance on Alan Mulally
Ford is currently viewed as being heavily reliant on Mulally's
leadership. He's 66 years old, and although he has not announced
plans to retire, no one can be sure how long he'll stick with the
company, and whether he'll be able to get Ford into a good position
before he leaves.
Conclusion and Valuation
I believe that as a high risk, high reward investment, Ford is
undervalued. The market is uncertain as to how to value Ford, as
there is little precedence to do so. With European economic
problems, slow American economic improvement, and uncertain global
economic conditions, Ford's highly cyclical operations are observed
Based on the current valuation as the shares trade for around
$12.50, with low price-to-earnings and low price-to-free-cash-flow
ratios, I believe Ford stock has a substantial margin of safety
factored in. My discounted cash flow analysis shows that even if 0%
free cash flow growth is assumed going forward, the stock is
undervalued. It would take sustained FCF declines, or negatively
cyclical declines, in order to make this a poor purchase, in my
view. Either reduced profitability from their credit arm, or the
possibility of profit losses from another recession, seem to be
accounted for by the market in the current stock price. In other
words, the concept that this may represent a movement towards a
peak in the business cycle, rather than still in the trough, is
clearly present in the stock.
Taking into account the various tailwinds that were described,
and the transformation and streamlining of the company, as well as
macro-economic problems and uncertainties, I think Ford Motor Co
stock could potentially make a good long term buy in the low teens.
It would, however, be a value play rather than a dividend growth
investment, and so would only be suitable for investors with
: At the time of this writing, I have no position in Ford. You can
see my portfolio
Eni: Strategic Plan Is Exciting, But Valuation Is
Where It Should Be