In this article, we review Ford Motor Company's (F) fourth-quarter report for 2012, a quick crunch in order to tide us quarterly-reading party animals over until the annual arrives in April. My focus will be on fundamental analysis with an eye toward valuation.
Ford Motor Company, as the reader knows, is an automotive manufacturer founded in 1903 that also produces luxury vehicles under its Lincoln imprint, and extends consumer loans via its credit arm, Ford Credit Services. It also owns small stakes in automakers Mazda and Aston Martin.
Here is a general rundown of the company's current condition as it relates to shareholders. Numbers are a wee bit round, but current as of 3/3/13.
|Common Shares Outstanding||$3.81 B|
|Total Assets||$190.55 B|
|Total Liabilities||$176 B|
|Automotive Liabilities||$79 B|
|Credit Liabilities||$97 B|
|Market Cap||$48.4 B|
|Book Value Per Share||$4.28|
|Revenues (Before Costs)||$134.25 B|
|Net Income||$5.66 B|
|EPS Growth Since 2007||$1.61|
|EPS Growth Since 2002||$1.97|
|Price to Earnings||8.88|
|Earnings to Book Value||0.34|
|Debt to Equity||6.57|
|Working Capital Per Share||$14.94|
Since its NDE in 2006, the firm has recovered admirably under CEO Alan Mullaly, and the difficulties the company faces today are small beer compared to the mortal threats of 2006-08. The corporate focus now includes a lagging European segment and an outstanding $18.7 billion dollar worker's pension deficit, as well as the steady repair of its bond-issue credit. As for its operations in the Old World, the company expects to meet the break-even point by mid-decade as it closes plants and reduces inventories to reflect Europe's continuing economic contraction. Likewise, Ford expects the pension deficit to be fully funded by mid-decade - contingent upon Federal interest rates, detailed discussion of which leads us a little beyond our scope, but I do touch upon it below. Whether these or other developments act as anchors to the company's future profits remains to be seen. Market share is a fickle and fluid thing in the auto industry, but with a healthy current lineup and a product pipeline that is attracting interest, Ford may soon claim General Motors' (GM) spot as America's top automaker if it continues apace.
If we wish to arrive at a reasonably bottom-level valuation, to estimate the lowest price to which a stock might reasonably fall under current conditions, we can use a "stingy" valuation such as: book value per share (minus goodwill and intangibles) + current earnings TTM + a halved dividend and -10% growth three years forward. Ford's SV stands at $10.20 [$4.28+$1.42+(.5*12)+($1.30*3)] which as we can see is not far afield from the present share price.
As mentioned previously on this site, the firm's total debt-outstanding figure of $176 billion is misleading. Ford is better thought of as two companies in one: an automaker, Ford Motor Company, and a lending agency, Ford Credit. (From here on, for brevity's sake, I may label the automotive arm "FA," Ford Credit as "FC," and the two conjoined as simply "F.") The credit liability is a sort of balance-sheet gremlin which plays havoc on the unsuspecting analyst's results - just look at that monstrous debt-to-equity ratio above. So let's examine this situation.
As we can see, FC accounts for some 55% of F's overall liabilities. That credit debt, however, consists of outstanding loans (underwritten by Merrill Lynch and indentured to BNY Mellon) made out to customers who meet requirements. This is not due-debt in the accounts payable sense but managed leverage repackaged as loans outstanding to its customers, incubated profit similar to the "debt" American Express or any lender may hold which the customer has not yet paid back with interest. If we look, however, at FA as a standalone concern (the breakdown is on p. 114 of the quarterly), the numbers look quite healthy compared to the recent past. While profits have dipped slightly from 2011 to last year, the sector's operating margin also decreased from 5.4% to 5.3%.
The "old" Ford was a diworseified monster of bloat, riddled with corporate fiefdoms. F's total assets less liabilities in 2006 was $290.8 billion, nearly $100 billion more than today's, if that can be believed. It is a vastly more efficient operation, as evidenced by the difference in operating margins: in 2006, the margin was a hideous -3.8%. Today, the company operates at a healthy 8.6% margin, ahead of most of its competitors (Toyota's (TM) margin, for instance, is 1.8%). The old Ford included roughly a dozen plants in North America which have since closed, its Jaguar and Land Rover segments, Hertz Rent-A-Car, and some other detritus which has since been shed. (The company recently invested $773 million in several Michigan plants, and has made moves toward reasserting its American manufacturing presence.) Today, the leaner, comparatively bloat-free Ford also comes with $20 B less in current automotive liabilities. Overall, FA has eliminated some $56.25 B in debt since 2006, which is enough to account for the entire company's current market capitalization and then some.
If we separate the two sectors (refer to p. 99 in the quarterly), we see that for 2012 FA's assets are $86.46B vs. liabilities of $79.16B for a total of $7.3B, while FC's assets equal $106B less $79B for a total of $27B. This $34.3 billion dollar total, free and clear of debt, gives us an adjusted book value per share of $9. The going accepted book value per share is what I posted above, $4.28, but I feel confident in my analysis here. I welcome comments. For one thing, it changes the stingy valuation, which I note now equals my calculation of the working capital per share. (Forbes currently has the working capital at $19.07, which I think is generous.)
So much for balance sheet dissection. Two primary concerns right now for management are a pension shortfall of some $19B and the brutal business climate in Europe. It's my guess that these two drags on the company-wide balance sheet are capping share prices; people are understandably afraid of buying into debt with a company that only recently escaped from the brink of bankruptcy with its skin intact.
Recent articles in the Wall Street Journal and elsewhere have examined one unintended consequence of the current rock-bottom Fed fund rates. The low rates on corporate bonds lower discount rates on pension plans as many firms with defined-benefit pensions - not just Ford - struggle to maintain funding. An 18% drop in the discount over 2012 caused Ford to sink some $3B into its pension pool as the deficit grew unabated. But pensions don't need to be fully funded, because they aren't paid at once: the company plans to be up to speed by mid-decade, and once interest rates climb it should indeed relieve some of the pressure, aided by lump-sum settlements (thus far targeted largely toward white-collar workers) aimed at taking liabilities off the books which have as yet totaled some $1.2B and are expected to continue. While the unfunded liability is considerable - accounting for some 38% of total market cap - I do not believe it will prove too damaging to long-term prospects assuming eventual Fed rate increases, not to mention medium-term revenue stability on Ford's part.
Ford Europe expects to lose $2B in 2013, and these numbers may even worsen due to the aforementioned pension woes (which affect margins worldwide) and a strong Euro. Pre-tax results cratered from 2011, when the auto sector lost $27 million, to 2012, when it lost $1.75 billion as the firm decided to restructure the segment as a whole. Similarly to the pension deficit, the company expects to have the situation cleaned up by mid-decade. In the meantime, if the North American segment maintains profitability - the segment set a company record pretax profit of $8.3B last year - proceeds from the credit arm may offset Euro losses and losses in South America.
So I tend to see the Company's two most apparent difficulties as causes for concern - and only that. Certainly, the difficulties the Company faces today are small beer compared to the mortal threats of 2006-08, and only slightly offset the positive developments in the North American segment and a growing presence in China.
If I put on my prognostication hat, the stars tell me that the firm is intent on building a sizable cash reserve as safeguard against future crisis episodes; this done, I expect the firm to re-purchase a considerable amount of its 3.85 billion shares outstanding. Indeed, F as a whole carries $5.37 per share in cash and securities. I reckon that they are waiting until around the time Mullaly - who was compensated quite heavily in stock while Ford was illiquid - retires at the end of 2014 (as indicated), to recompense for a job well-done in navigating the iconic American carmaker back to profitability after its very survival was in doubt. The number of shares outstanding has increased 58% since 2007, diluting per-share value largely to pay off short-term debts and award patient executives. The amount of "other stockholder equity" on its balance sheet has increased from $14.3 billion in 2010, to $18.7 billion in 2011, to $22.8 billion in 2012, which certainly bears some looking into. As we see in the report however (note 20, p 168) we discover that the lion's share of this $22.8 billion falls under "pension and other post-retirement benefits." So we find happily that pension deficit is baked in to F's numbers for the year and no cause for undue concern. Another suspicious item I'd noticed in past Ford reports that might work against the outside common shareholder was a warrant which allowed holders to purchase 1.0212 shares at $9.01 a share, though it expired New Year's Day. (Warrants are a Mephistophelian device.) Past that, there seems to be no funny business on the balance sheet, but I would prefer the company lay off the derivatives, which accounted for a net loss of $175 million over last year. I tend to distrust derivatives as a species (but I do love my put option sales).
In a good economy a forward-looking Ford Motors with exciting cars, the promise of greater worldwide expansion, and superior operating efficiencies should sell well enough over the present price-earnings ratio to make today's terrestrial 8.88 P/E ratio look enticing indeed. I feel that the firm is worthy of further investigation by the bargain-conscious investor who can overlook deceptively high debt numbers.
Guessing at the true intrinsic value of a security is always a nebulous proposition. But if we jack our earnings multiple up to 15, which is what Ford might sell at in a fairly late-stage bull market, we are in the neighborhood of $20 per share, which would be overpaying for Ford given current conditions. Being a thrifty type, and counting on the newly-instituted dividend to lower my perceived cost basis over time, I would recommend purchasing Ford anywhere below the $15 mark, and upwards if one is feeling bullish or has a higher risk tolerance than I do. The company should have some good years ahead of it, and I intend to hold my position, adding on dips and selling put options like a wig salesman in a Texas whorehouse. All this makes the risk-takers who bought in at $3 during the financial crisis look prescient indeed.
Disclosure: I am long F.