The Ford Motor Company (NYSE:F) and its products are among the most popular brands of cars and automobiles worldwide. Through the years, the company has maintained its "classy" image, while still offering competitively priced products. Ford is among the leaders of the industry, along with Toyota Motor Corp. (NYSE:TM), Honda Motor Co. (NYSE:HMC) and Daimler AG (OTCPK:DDAIF). But is Ford stock worthy of investors' money at the present time?
In this sort of business, there is no room for mere intuition and guesswork - there needs to be a basis for any investment decision. This article will try to determine Ford's fate, using the current trends in the economy, as well as market updates and new product lineups. However, before we do that, we are first going to compare Ford with its main competitors.
Ford and the Competition
According to data from Morningstar, Ford's major competitors are Toyota and Honda.
Dividend Yield, %
Return on Equity
Upside Potential to Reach a Fair Stock Value
Data as of December 1, 2012
Taking a short-term look at Ford and its main competitors, Ford looks extremely undervalued when compared to its rivals. The TTM P/E ratios of both Toyota and Honda are above the industry average, while Ford's is three times lower than the average. Hence, investors might argue that Ford seems a rather better alternative to its competitors.
The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the three competitors, suggests the following: currently stocks of Ford and Toyota are undervalued. However, EFS's fair stock price valuation indicates that Ford stock is trading at an extremely high discount.
Although Ford stock seems particularly undervalued, with an ROE of 142.5 the company is far ahead of its rivals in terms of profitability. Moreover, Ford's dividend yield of 1.8% is more attractive than Toyota's, and similar to that of Honda. However, these judgments would be incomplete without considering the other key financial indicators at hand.
The debt/equity ratio of Ford is quite high compared to the industry average and its competitors. If people were to look at this indicator alone, it might cause alarm. This is because a 3.8 ratio means that the company is quite aggressive when it comes to financing its business growth through the use of debt. Consequently, this will result in a relatively volatile level of earnings.
Combining the above-mentioned facts, investors will see why Ford is still a popular and sound investment at the present time. This is, in fact, what matters most for the majority of investors; it defines how much value their investment has.
The Future of Ford and the Automobile Industry
Ford has been in the headlines for several days already. Firstly, analysts expect Ford to compete side by side with Toyota for its share of the hybrid market. Secondly, moves for the venture split with Mazda in China would certainly support the positive view of analysts for this stock.
However, while Ford's recent aggressive moves to boost its marketing efforts and sales are key contributing factors to improving its performance, the market itself will still play the major role. In other words, the performance of the automobile market and its resilience to the global economy would still be the biggest determinants.
In this regard, it seems that the economy is moving hand in hand with the positive outlook for the automobile industry. This is because the forecast for unemployment rate in the United States, for instance, is expected to decline by only 6% from its current level of almost 8%. This is good, because if more people get jobs, it means that people will have a greater potential to purchase and pay for cars. Hence, there could be higher demand for automobile products that would certainly boost Ford's and the overall industry's sales.
Beyond the tendency of people to buy cars, there has been a strong demand for environmentally friendly cars and automobiles. In this green segment, Ford is clearly the closest challenger to Toyota's throne. Aside from that, people are also interested in fuel efficiency, which allows them save money in the long run. Specifically, its Fusion and C-Max offerings will be the driving force behind Ford's better valuation in the coming months. Hence, it is safe to say that buying would be a rational investment decision, since the company's sales performance is expected to soar over the next six months, at least. In the long run, I believe Ford will continue to be a sound investment at its currently undervalued price. As a rule of thumb, who knows if the market's corrective forces may soon affect its price?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.