Ford (F) primarily operates in the automotive industry with a relatively smaller scale of operations in the financial services industry, contributing to approximately 22% of the company's revenues. Ford has recovered impressively since the financial meltdown of 2008 - since 2009, the company's stock has shown a CAGR of 55.41%. However, since the start of the year, the stock has fallen almost 6%.
Ford had a good run at the end of the last year, and carried that good run into the new year. However, the stock was not able to maintain its run and at the end of January, it started to come down. I believe this fall in price is temporary and the stock will again rise soon. In my opinion, the recent dip gives long-term investors an opportunity to add to their positions.
According to the March 2013 Sales Report, the company's sales in the U.S. have risen by 6% to a total of 236,160 units. This is Ford's best monthly sales performance since May 2007. These sales were essentially driven by Fusion and Escape, two newly introduced vehicles. Ford F-Series, the highest selling truck, also projected a 16% increase in sales units. Before March, the U.S. sales for the month of January increased 22% to a total of 166,501 units.
The geographical diversification remains limited and the emphasis of operations remains domestic to a large extent (approximately 50% in worldwide wholesale volume). Therefore, the company manages to profit strongly, despite the fall of market share in Europe from 10% in 2008 to 8.3% in 2011. Along with the strengthened positioning in the U.S., Ford also enjoys strong customer loyalty as compared to its competitors.
Comparison with the industry
The company reported net income of $5.7 billion, or $1.42 per share declaring a cash dividend of $0.15 per share for 2012. Despite the extensively competitive nature of the automotive industry, a gross margin of 14% was maintained by Ford and Toyota Motor (TM) while General Motors (GM) operated at a gross margin of 10%. The operational efficiency of the company, following the One Ford mission, is reported to be 4.7% as compared to the industry average of 4.3%.
The company operates with ROE of 36.58% as compared to the 13.18% industry average. According to Global Credit Research by Moody's, the sales could improve by 2014 as the economy starts to gain momentum in its recovery. The rating agency believes that the demand for light vehicles in Western Europe could go up by about 5%. However, the estimates for 2013 are not hugely impressive. As a result, the company is taking steps to reduce its exposure to European market risks. The company introduced restructuring initiatives, reducing operations in the U.K. and Belgium, and a decrease in workforce by about 13%.
Fundamentals and Potential Risks
In the automotive industry, Ford has one of the strongest fundamentals and the company remains undervalued with a huge potential for profits. The P/E ratio of the company is 9.5 and it is currently operating at a forward P/E of 8.86. This valuation remains particularly lower than the industry as some large players remain overvalued. The industry's P/E ratio of 12.13 serves as an apt representation of Ford's undervaluation. The estimated PEG Ratio for the company is 1.03 and the P/S ratio is only 0.4, compared to industry average of 0.5.
There are a number of risk factors that can be harmful to the company's performance and therefore, render the stock's undervaluation useless for profitable investments. These include a decline in sales volume in the US due to financial distress. Ford has gained sizable advantages through its lack of geographical exposure. However, this may expose the company to financial shocks in the U.S.
In my opinion, the fundamental positioning of the company in the automotive industry will, in fact, prove profitable for investors as the U.S. economy has started to show signs of significant improvement. Furthermore, the advantage from decreased cost of lending and basic materials, coupled with the strong fundamentals, will provide an edge to Ford. We are seeing a substantial recovery in the North America, which is being translated into an increase in sales. As the recovery in the economy gathers pace, Ford will be one of the primary benefactors as the automotive industry is always at the forefront of an economic recovery.