Ford: A Value Despite 40% Rise Since August

 |  About: Ford Motor Company (F)
by: Northrop Puckett

Ford Motor Company (F) announced strong sales numbers on Friday, as did other auto makers, and seems to hint at a strong consumer. This is something I thought could happen in 2013, as noted here, and it bodes well for the large item consumer discretionary companies going forward. Let's look at Ford individually and then compared to its competitors.

Recent News

Ford announced that its February sales were up 9% compared to last February. Sales of utility vehicles were up 21% as exemplified by the Explorer and Escape sales increases shown below. Truck sales were up as well, and they constitute a large portion of overall sales. The Escape and Fusion redesigns are obviously working.

Sales Increases In Key Vehicles

Make 2012 2013 % Change
Explorer 10,440 16,586 58.9%
Escape 18,666 24,110 29.2%
Fusion 21,773 27,875 28%
F-Series 47,273 54,489 15.3%
Click to enlarge

Other recent developments include Ford announcing that its AppLink software will be open-source. This will allow developers to freely contribute to AppLink. AppLink is a dashboard interface that allows drivers and passengers to access their smartphone with their voice. This is exciting because the collaboration and ideas that result from open source software always produce fantastic ideas. This is good for Ford.

Spotify, a popular commercial music streaming service, announced it is working with AppLink and voice commands for Spotify. Spotify will roll out on AppLink in coming weeks. If you haven't tried Spotify yet, it is pretty great - try it.


Ford has good financials. Their financial rebirth really occurred when Alan Mulally took over and soon thereafter Ford agreed with union workers to restructure retiree healthcare costs. As you probably know, that fact, along with sales of Land Rover and Jaguar and Volvo restructuring, helped them get into such a positive financial position that they were able to reject government loans during the '08 Financial Crisis. Have they maintained that strong financial health? Mainly, yes.

While its stock may have gotten a little ahead of itself, it has pulled back a bit, and there is still a long-term value if purchased.

Ford Industry
PEG .84 1.33
Forward P/E 7.51 11.60
Price to Cash Flow 4.6 4
LT Debt to Equity 4.54 .82
Return on Investment 6.4% 4.6%
Dividend Yield 3.2% 1.7%
Click to enlarge

While you could just look at PEG or forward P/E to see if price is reasonable compared to earnings growth, I like to look at both to gage value compared to the next year, and then compared to the next couple of years.

Ford has a PEG of .84, indicating that it is under-priced compared to future earnings growth a few years out. Its forward P/E also reflects this value. Meanwhile the industry averages for PEG and forward P/E are pretty low as well, although they are skewed slightly higher by one outlier. This low industry valuation may indicate that investors are still hesitant to believe in them and in the economy at large.

Ford's price to cash flow is slightly higher than the industry average. In this ratio, the lower the number, the better. While Ford has a slightly higher price to cash flow ratio than its industry, it is partly due to the financial health that it exhibits. Investors know that it is a leader in the auto maker industry.

The long term debt to equity ratio looks high. Don't worry too much about the debt though. Its mostly from Ford Credit. The company's financing arm has about 85% of the debt. Stripping that out makes it very comparable to the industry average. It is worth noting that the car production related debt has increased marginally though. But it is nothing to worry about yet.

Return on investment indicates that management is efficient and doing better than the industry at large. Would you expect anything less from the team that organized the turnaround in 2006-7?

Finally, the company is healthy enough to pay out a dividend significantly higher than its industry peers. Ford's current dividend yield is 3.2% which makes it a candidate for those investors looking for yield in their portfolio.

If there is a concern, it is that gross margins have been coming down the past few quarters. This could be related to lower volumes, especially last year. The decrease in margins is also partially due to increased structural costs. CEO Mulally said in the last earnings conference call that those structural costs increased with "new product launches, investments in support of future products, capacity, brand building plans, and higher pension expense."

Mar 2011 June 2011 Sept 2011 Dec 2011 Mar 2012 June 2012 Sept 2012 Dec 2012
Gross Margin 19.14% 17.66% 16.43% 14.11% 17.23% 16.39% 17.5% 13.76%
Click to enlarge


As you can see in the chart, Ford has broken below the Tenkan and Kijun and fallen into the cloud. From a technical perspective this sends a signal of neutrality, rather than bullishness or bearishness. Also, the RSI seems to be having trouble regaining 50+, which is not bullish. A break through the cloud would be bearish and indicate downside.

(click to enlarge)Daily ChartClick to enlarge

The Play

I expect the market to pull back this month as noted here. However, that should provide a good buying opportunity to get into Ford. As noted in the chart section, Ford is currently neutral in trend based on Ichimoku analysis I prefer to use in charting. For me to buy it would take the stock breaking back above the cloud and tenkan (blue line) and kijun (red line). It should be noted that my time frame on most investments is shorter than most long-term investors. This may influence where you choose to buy into a stock, including Ford.

Disclaimer: We do not know your personal financial situation, so the information contained in this article represents my opinion, and should not be construed as personalized investment advice. Past performance is no guarantee of future results. Do your own research on individual issues.

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.