Rumors swirling around Alan Mulally becoming the new CEO of Microsoft (MSFT) just got knocked down a peg. Mulally, currently the CEO of Ford (F), told USA Today on October 1 "I love serving Ford and have nothing new to add to [My] plans to continue serving Ford."
While he didn't explicitly say "no", there is a good chance Mulally will indeed stay with Ford, and he has indicated in the recent past that he will stay on board at least through 2014. Retaining Mulally for as long as possible is good for Ford, especially since he is the man who is largely responsible for the company's turnaround and 16 consecutive profitable quarters.
A strong balance sheet
Ford is financially strong. It carries a lot of debt, but as pointed out by Seeking Alpha contributor Jacob Steinberg, this debt is often misunderstood.
About $91 billion of its $107 billion in total debt is due to Ford Credit. The debt belonging to Ford Credit is generally accompanied by an asset such as a car or is lent to Ford automotive, so the credit risk is low. As of the company's most recent quarter, Ford Credit generated $2.1 billion in revenues and its pre-tax profit is expected to be around the same as it was in 2012, when it contributed about $200 million in distributions to its parent company.
Debt related to Ford Credit's financial services helps make the company money; so its automotive debt is the primary "bad debt", and this debt balance is only a little more than the company's cash balance. While many will argue that debt is debt, Ford's debt situation isn't as scary as it looks at first glance and its core debt level is more than manageable.
Valuations and fundamentals
Ford is cheap, trading at 11.32 times earnings, and looks even cheaper going forward at 9.77 times forward earnings. For a comparison, its main rival, General Motors (GM) trades at 12.86 times earnings and 7.84 times forward earnings.
Ford posted a 50% year-over-year increase in earnings per share during its last quarter, which it reported back in July. The company will post its third quarter earnings on October 28. There is a good chance that the results will be positive for investors, especially after Ford posted its best September sales since 2006. Its popular Fusion and Fiesta models also broke new records for September, with sales up 62% and 29%, respectively.
Besides strong sales, earnings momentum, and cheap valuations, Ford also pays out a nice 2.40% and growing dividend. Ford doubled its dividend payout back in January from $0.05 to $0.10 a share, and the company certainly appears to be well on its way to becoming a nice dividend growth stock. Especially since future profits are promising and the payout ratio sits at only 20%.
Risks and what-ifs
If Alan Mulally does "up-and-leave" for Microsoft, Ford's share price may take a temporary hit. Other than that the automaker looks like it will continue to charge ahead. The current mess in Washington and/or an economic slowdown are current causes for concern, but as long as Ford keeps selling cars, the shares look cheap at current levels.
The bottom line
Shares of Ford are attractively valued and offer a good starting yield backed by a strong balance sheet. There is also a strong possibility that the company will continue to increase its dividend and earnings with CEO Alan Mulally running the company. I am considering adding more to my position on any pullbacks, and suspect more upcoming market volatility will provide me with that opportunity as Washington bickers over the debt ceiling and uncertainty looms. Ford is a buy.