In recent times, Ford Motor Company (F) has been doing pretty well for itself. Coming off the back of rising debts and interest rates from 2005, with bank payments of $500,000 annually, realignments that involved the sale of their Hertz Rent-A-Car subsidiary, dwindling profits, and the debilitating 2008 financial crisis that forced car manufacturers to seek a bailout from the government, the future was surely looking bleak.
Fast forward to 2012, and Ford is back amongst the living. The losses reported in 2009 worth over $14 billion are now outdated. This year boasts pre-tax operating profits of over $1.8 billion in consecutive quarterly reports. This positive news is coupled with the Fitch Ratings company raising the profile of Ford corporate bonds again to investment status. With Ford also having overcome rigorous selection processes to be named in the top 100 apprenticeship companies, the outlook points to an adequately rehabilitated company. Nevertheless, are improved quarterly results a false dawn for the Ford Motor Company, or are they an indisputable reflection of a company on an upward trajectory?
The 2012 financial statements indicate a Q1pre-tax operating profit of $2.3 billion, or 39 cents per share. These figures set the stage for comparing progress over the course of the year. Q2 generated a pre-tax profit of $1.8 billion, or 26 cents per share. Analysts believe this highlights a significant decrease from the first quarter due to losses in Asia and Europe. Many people probably sold their shares, but there was no need for investors to shy away from Ford stock, as best-ever Q3 2012 proved to be a very good time in the company's history, with the pre-tax profit standing at $2.2 billion, or 40 cents per share. This can be attributed to higher sales and a positive perception amongst investors.
The end-of-the-year results represented an increase of over $460 million over 2011, the total revenue for 2012 dwarfs that obtained in 2010 by $15 billion. The company is growing steadily despite setbacks in Europe, which incurred over $460 million in losses. October car sales reinforce this notion, posting the highest increase of over 50 % in 11 years. Ford China was not going to be left behind either, with a 40 % increase in sales for August and September. With Ford Asia now showing signs of recovery, only Europe is lagging behind, but this should not deter investors, since Ford North America and Ford Credit were highly profitable.
What Does the Future Hold?
It is a mixed report when discussing the future of Ford. On the one hand, there is the continued market growth of the company, and on the other hand, there are poor showings in foreign markets, and image and reputation blunders along the way - for example, call backs on the Ford Focus. Ford's public image is also not helped by reviews from Consumer Reports, which highlight mistakes in incorporating new car technologies - for example, touch screens with multi-functional usage, from mapping to Internet connectivity.
Their main competitors, Toyota and General Motors (GM), have also had image troubles, with Toyota again issuing callbacks for over 2 million vehicles, and GM bumbling its way through technology by adding MyLink and IntelliLink to their cars. Surprisingly, though, sales are still high for GM, with the Asian market providing ample opportunities, and Toyota's new Camry boosting sales to improve profit forecasts to $9 billion.
According to Ford's executive chairman, Bill Ford, the fiscal cliff agreement between the president and congress will be "vitally important" to the future of the US economy. Uncertainties over the US economy and fluctuating crude oil prices have pushed Ford into forming a partnership with General Electric Company (GE) to research, develop and sell alternative-fuel vehicles. This should help improve the status of the Ford C-Max plug-in hybrid vehicle as the car industry delves into the world of green living.
Make or Break for Investors
The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the three competitors, suggests the following: at a price of $11.49, currently Ford stock is undervalued. EFS's fair stock price valuation indicates that Ford stock is trading at an extremely high discount and has 223% upside potential to reach its fair value. The company is trading at a low share price due to product launches (for example, the 2013 F-150 King Ranch), and cost-cutting measures in line with streamlining the company.
Over the years, Ford has streamlined its business, and the results have been showing since the emergence from the crippling recession. Even though the company has been hit with image tainting callbacks, decreased sales in Europe and increased competition in Asia from General Motors, the stock has maintained a positive percentage change over the course of the year. With the world coming out of the recession and increased demand for new vehicles, car technologies and hybrid alternatives, the car industry is likely to experience a boom in upcoming years. Starting from next year, Ford will likely benefit especially from their strong North American arm and through increased sales of their Ford Focus and Fiesta alongside other sport utility vehicles in China. This growth will be reflected in their stock by the second quarter of 2013, possibly matching their high of $13.05 for this year. Analysts believe that Ford is a good long-term investment option, because of its safe trading price and expected growth next year.
The future looks bright despite potential pitfalls that may arise along the way. The improved quarterly results reflect years of restructuring for the Ford company, and it would be callous to think that the heads of the company do not have the foresight to steer the company in a continued upward trajectory, while remaining competitive against other car makers. Ford stock is a great buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.