Ford (NYSE:F) is currently experiencing a resurgence in its sales, which are surpassing those of its competition. Ford sales for February of 2013 have increased by 9% over the same period in 2012. For January of 2013, sales were up 22% over the same period in 2012. By contrast, General Motors (NYSE:GM) sales for February 2013 have experienced a 7% increase over the same period in 2012, while Toyota Motors (NYSE:TM) has experienced a 4 % increase in sales for the same period. In the auto sales rebound, Ford has experienced the highest sales growth rate among the major players in the market. Its sales are growing, even though its share price is undervalued relative to its competitors.
Out of five Wall Street analysts evaluating Ford, two recommend a Buy, one indicates an Outperform rating, whereas the other two prefer the neutral Hold rating. This situation creates a bit of uncertainty for the average retail investor -- should he or she jump in with both feet (Buy) or remain on the sidelines (Hold) for the time being until additional guidance is received?
This article will lay out the specifics of the company and calculate its fair share price in order to see whether or not the stock is offering good value for the money.
Since 2008 until recently, auto sales have remained lackluster. As a result, Ford's market share has been up and down. In 2012, Ford's market share declined from 16.5% to 15.2%. However, from November 2012 onwards, the trend of the auto industry has changed and auto sales have revived. The spike in sales had a magnified effect on Ford's rebound , as its sales exceeded the growth of the overall auto market for the first two months in 2013. As a result, Ford is seeing an increase in market share.
Since 2009, the auto industry has witnessed a growth rate of 53%. In addition, All-Wheel-Drive technology (AWD) has outpaced the industry with a 72% growth rate. This represents the preference of customers for driving confidently in safe vehicles. With the AWD technology leading the way, Ford has been capitalizing on this golden opportunity by making the AWD system available on its non-luxury brands and rendering itself unsurpassed in the number of AWD vehicle offerings.
Ford's Vehicle Unit Sales
Until 2009, Ford went through a time of declining sales growth, given the recessionary pressures in the economy. In 2010, unit sales rebounded significantly from the slump, only to fall into negative growth again in 2012. However, with the auto industry in a revival state, Ford has bounced back to record the highest sales growth compared to its competitors.
Fair Stock Valuation and Future Growth Perspective
There are many ways to estimate the fair stock value of a company. For this purpose, we applied the discounted-earnings-plus-equity model developed by EFS Investment analysts to Ford's stock. The calculations based on this model allow us to suggest the following: currently, Ford's stock is well undervalued. In addition, EFS' fair stock price valuation indicates that Ford is trading at the attractive discount. At a price of $13.43, F stock has at least 46% upside potential to reach its fair value range, which spans between $20 and $24.
Let's start with a discounted cash flow (DCF) method to unlock the potential price appreciation of Ford.
Revenue Growth Assumption
Keeping in mind the global recognition of the DCF method and assuming a long-term, constant growth of 2.0% in the revenue stream for Ford, the enterprise value comes out to be $129.19 billion, and the fair value of Ford comes out to be $ 15.52 per share.
Tracking Competition in Financials
I have selected General Motors, Toyota Motors and Honda Motor Company (NYSE:HMC) to compare to the Ford Motor Company and to analyze where Ford stands in the auto manufacturing market.
At the time of writing this article, with the P/E ratio of 9.12 Ford seems well underpriced compared to its competitors; the company has a P/E multiple 28% lower than the average of the group selected. The price to sales multiple is a bit above General Motors, but well below Toyota Motors and the Honda Motor Company. Price to book value does not favor Ford, but the Enterprise Value to Sales & EBITDA is well above the average of the group. Pricing Ford on the basis of the average multiples, we get the following metrics:
Ford operates at a large risk because the automotive business is highly cyclical. The macro-economic factors have a tendency to negatively impact the company and high labor prices are also at play. There are many risks including currency risks, commodity price risks, and so forth.
At the peak of the recession, when the auto industry was on the verge of collapse, General Motors and Chrysler accepted billions of dollars in government bailouts. However, Ford did not receive any government money, nor did they go bankrupt. Instead, Ford took out a large line of credit before the collapse and continued operating. Because the industry is rebounding and their operations are running smoothly, Ford is placed at a very favorable position to organize its debt repayments and let the profits trickle down to its bottom line, further impacting the stock price favorably.
Dividends and Financial Muscles
Ford has a long, stable history of dividends. It has paid them over time for the most part, but with no promise of regular annual dividend increases. The company accumulated $105.06 billion in total debt with debt to equity ratio of 6.44. That made investors believe that the company may not be able to produce enough cash to meet its debt commitments. However, the recent announcement of Ford increasing its quarterly dividend by 100% has mitigated these concerns. The confidence of Ford in its prospects also highlights its potential to repay its debt in the future.
The way same way the auto industry fell victim to recessionary pressures, Ford has also suffered the recession's effects over the years 2008-2010, as its equity remained negative. Ford was on the verge of bankruptcy and investor confidence was shaken due to the deteriorating financial position of the company. However, it rebounded quickly and the liquidity and solvency ratio have bounced back to pre-recessionary levels. The equity in the company became positive, its debt/equity ratio improved, the financial leverage decreased and return on equity became positive (as depicted in the above tables). With significant improvement expected in the future, a better financial position in the industry is expected.
Ford has great growth prospects and impressive potential for share price appreciation. As previously stated, Ford experienced a tremendous growth in sales by 9%, higher than any of its competitors. Ford presents a great opportunity to profit from investing in its stock. The recent tremendous growth recorded by the company and its ability to survive through tough economic circumstances have earned Ford the designation of a profitable buy.
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.