New Opportunities And Operational Strengths Make Ford A Buy

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 |  About: Ford Motor Company (F)
by: Globenum

Ford (NYSE:F) has seen a significant drop in revenue and gross margin in Q32012. Although the company has reported an EPS of $0.4 beating analyst consensus on $0.3, it has also reported continuing problems in the European markets. To solve its issues in Europe, F has relied on cost reduction by closing facilities in Southampton. While we don't consider this step a long term solution to F's strategic issues in Europe, we are optimistic about its performance in America. This mainly is because of the rise in SAAR in US. While consensus points toward SAAR of 14.5, the current level is 15.5 indicating a bullish trend in the US auto market. Moreover, we also feel that F is strategically suited to deserve a buy rating.

The primary reason behind our bullish orientation is F's fair operational performance. The net profitability has increased by 56% if compared to Q22012 despite high tax payment. We feel that this has mainly been because F has been able to cut its expenses by 29%; a much better performance than its key rival General Motors (NYSE:GM) which was able to cut expenses by 4% only. However, we feel concerned about F's drop in revenue as GM has reported an increase in revenue by 11%. We feel that in order to improve its revenue base, F needs to rethink about its product offerings in Europe as the bad economic conditions there are structural rather than cyclical in nature.

Still another reason why we have a buy for F is the existence of some potential value in its stock. If analyzed from a relative perspective, F does not seem overvalued. If valued using historical and competitive averages of P/E, F's stock can generate a capital gain of 10%. F is trading at a P/E of 8x versus competitors' average of 9x. Based on its historical average P/E of 8.5x and forward EPS of $1.46, we set a target price of $12.57.

A Relative Analysis Based on Multiples (NYSE:X)

Company

Ticker

Trailing P/E

Forward P/E

PEG

P/S

EV/EBITDA

Ford

2.57

7.75

1.47

0.33

10.31

General Motors

9.54

6.79

0.67

0.26

1.96

Toyota Motor Corporation

(NYSE:TM)

14.17

10.68

0.30

0.50

8.03

Honda Motor Corporation

(NYSE:HMC)

14.10

9.22

0.38

0.52

8.95

Competitor Average

10.10x

8.61x

0.71

0.40

7.31

EPS Current F

$1.46

Historical Average P/E

8.51x

Target Price of F based on historical average

$12.42

Target Price of F based on competitor average

$12.57

Current Market Price of F

$11.39

Approximate Capital Gain

10%

Click to enlarge

Although hurricane Sandy has caused huge losses to the U.S. economy, it has also brought opportunities for different sectors, including automobile. Flooding in the affected areas has rendered many cars useless creating room for new car sales. Reports of a boost in auto sales have been received. People are now heading to showrooms to buy new cars, a dream long desired by auto companies. The situation was very different before the storm. Because of recession, people used to drive old cars. But now, new car sales have started moving up. Although is hard to judge which companies will benefit the most from this seasonal opportunity, F seems to be a very strong candidate. The company has reported that its U.S. auto sales this November are between $1.12 and $1.13 Billion; a 10% rise if compared to same period of previous year. This indicates that F is well set to benefit from the coming opportunity.

Still another reason behind our buy rating for F is its revamping plan for the Lincoln brand. F has designed a new marketing campaign in this regard and will release highly expensive ads in the Super Bowl. Moreover, to make the brand a success in luxury auto market, F's CEO has hired the Lexus specialist Jim Farley for this campaign. "Well Jim Farley might be my best acquisition ever. He is just a fabulous leader. He is a product person. He is a marketing person. He lives and breathes and cares about making cars," said Alan Mulally (CEO Ford) in an interview with Bloomberg. As people are now heading to showrooms to buy new cars, launching Lincoln can be fruitful.

Our stance

The recent Sandy crisis and Ford's new focus on Lincoln is expected to generate new highs. We believe that F has some value in its stock with a potential capital gain of 10%. We have a buy rating for F.

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.