By Matt Doiron
Ford (F)'s auto sales continued to surge in April, with an 18% gain over April 2012 and a continued increase in the company's market share to 16.5%. Year to date sales at the company were up 13%, among the best out of all the automakers and quite a bit better than other major players such as General Motors (GM), Chrysler, and Toyota (TM). Ford's 10-Q shows that the first quarter of 2013 went quite well, with revenue rising by 10% versus a year earlier; lower margins, however, resulted in pretax income only rising by 4% (the reported earnings growth rate was considerably higher, but this was due to Ford facing a lower effective tax rate in Q1 of this year). In addition, that improvement in pretax income seems to be explained by income from affiliated companies rather than core operations.
Some investors, including billionaire David Einhorn in a long case for GM last fall, have argued that the U.S. consumer auto fleet is old compared to historical data. Assuming that on average cars are not much more long-lasting than they previously have been, this suggests pent-up demand for new cars which could be a boon to the entire auto industry, including the automakers. It could be argued that we are starting to see this play out, given the strength of the sales numbers, though of course we'd be a bit concerned that Ford doesn't seem to be managing to capitalize in terms of its pretax income.
On a geographic basis, North America was the big bright spot for Ford last quarter- revenue rose 20% compared to the first quarter of 2012, with a somewhat smaller increase in pretax income. Sales actually fell in both South America and Europe, however, with pretax losses in each geography. Currently Ford trades at 11 times trailing earnings. Wall Street analysts expect fairly low earnings growth over the next year and a half, and as a result the forward P/E is 10. In addition, the company pays a dividend yield of 2.7%- not high enough for consideration as a pure income stock, but certainly worth noting.
We track quarterly 13F filings from hedge funds and other notable investors as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) and can also use our database to find funds who like Ford. We see that billionaire David Tepper's Appaloosa Management reported a position of almost 12 million shares at the end of March (see Tepper's stock picks) while Caxton Associates increased its holdings to a total of 6.5 million shares (find Kovner's favorite stocks).
We've already mentioned GM and Toyota as peers for Ford. While GM's first quarter was considerably rockier than Ford's- both revenue and earnings were actually down compared to the same period in the previous year- the sell-side is considerably more optimistic on the company's future. As a result, its forward earnings multiple is only 8 with expectations for continued growth placing its five-year PEG ratio well below 1. Toyota's revenue has been up only marginally, though the combination of optimism in autos and rising Japanese stocks have pushed its price up 57% in the last year. It currently carries a premium to its American peers, with a valuation of 16 times trailing earnings, but analysts are looking for high growth here as well.
Ford can also be compared to Honda (HMC) and to Tata Motors (TTM). Honda's numbers have been good- revenue 14% higher last quarter than in the same period in the previous fiscal year, and earnings up 6%- and while it too is more expensive than Ford and GM in terms of earnings multiples, we think that it's worth looking into how well this performance can continue. Tata is actually cheaper than the American automakers, but it has actually been seeing lower earnings and little change on the top line. It may be good for a watchlist in case business stabilizes, however, given that it is in pure value territory at 7 times forward earnings estimates.
Ford is certainly cheap, though as we've noted earnings have thus far shown little reaction to the increase in auto sales. It does seem to be a better option than GM, but we think that investors should probably be looking at Honda and Toyota first if they are interested in the general automaker thesis.