Can Ford Double Once More?

Oct. 9.13 | About: Ford Motor (F)

Ford Motor Company (NYSE:F) is an American icon and is once again back on top. Company results are approving across the board with increases in new sales and emerging market penetration. In fact, I believe Ford Motor is one of the best auto plays in the future. I have previously written about the importance of decade-long automobile manufacturing experience. I pretty much have related to my investment in General Motors (NYSE:GM) which I believe to be tremendously undervalued at an ex-cash P/E of around 4. Both General Motors and Ford have high cash values per share, low P/E and P/FCF multiples and great sales development. Given Ford's large revenue base of about $135 billion in revenues shareholder value is likely to be driven by multiple expansion coming from a sustained economic recovery and emerging market demand.

So far Ford has done extremely well for shareholders and I regret not having initiated a position sooner since I am still heavily concentrated in turnaround companies such MGIC (NYSE:MTG), American International Group (NYSE:AIG) and Fannie Mae (OTCQB:FNMA). Over the last two years Ford began to underperform its peer General Motors and Toyota Motor (NYSE:TM). Ford has gained 47% while General Motors made up for previously lost ground with an increase of 51% and Toyota Motor rocketed 88%. Ford shares have doubled many times before in value during the economic recovery bringing total gains up to 730%. I believe Ford Motor's recent underperformance is a chance to snatch up a first class business at a depressed multiple.

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Sales picture

Ford Motor faced a bleak outlook in 2009/2010 as the bailout of the auto industry and plummeting car sales were the talk of the country. With the release of September car sales numbers Ford has proven that its products remain competitive and figures indicate that Ford's products are in strong demand. On October 1, 2013 Ford released its September car sales numbers and posted impressive results: Sales in September were the best since 2006 (a year in which easy credit and financing terms caused a surge in debt-financed car deals) and sales have increased for eleven month in a row y-o-y:

DEARBORN, Mich., Oct. 1, 2013 - Ford Motor Company sales totaled 185,146, delivering its best September since 2006 with a 6 percent increase in the U.S., outpacing the industry and marking Ford's 11th consecutive month of year-over-year sales increases.

"The combination of great styling, fuel economy and value delivered another solid monthly result for Ford in September," said Ken Czubay, vice president, U.S. Marketing, Sales and Service. "We're particularly encouraged by the strength of the Fusion and Fiesta, especially in coastal markets. The F-Series also keeps delivering, with our fifth-straight month surpassing the 60,000-vehicle mark and continuing as America's best-selling vehicle."

September Ford Fusion sales of 19,972 are up 62 percent compared with a year ago. Through the first nine months of the year, Fusion retail sales are experiencing their strongest rate of growth in the west, up 59 percent. In the southeast, Fusion is up 26 percent.

September Ford Fiesta sales of 5,043 are up 29 percent over last year, marking Fiesta's best September sales performance ever. Through the first nine months of this year, Fiesta's largest retail sales market is in the west, which is growing at the fastest rate of all of Fiesta's markets - up 41 percent.

Posting a 26th consecutive monthly sales increase and its fifth-straight month above the 60,000-vehicle sales mark, F-Series sales were 60,456, up 10 percent.

Ford continues to produce successful models which face strong market demand. Contrary to hyped companies such as Tesla (NASDAQ:TSLA) Ford actually sells hundreds of thousands of cars every month. And growth in vehicle sales is likely to come from emerging markets in the future with richer developing country populations wanting to spend their new found wealth.

Vinay Piparsania, Ford India's executive director of Marketing, Sales and Service commented on October 1, 2013 on Ford's retail success in India (Ford India's domestic wholesales grew by 37 percent with 10,640 units sold this September compared to 7,794 sold last September, another record):

"Despite prevailing difficult economic conditions, we are excited to see our products finding greater acceptance among customers that is mirrored in our sales. Our exciting range of fuel-efficient, reliable and value for money products seems to have struck a chord with our valued customers and we will continue to build on this through the auspicious festive season."

The most recent results only allow one conclusion: Ford is back and on its way to the top.

Valuation

Ford's operating cash flows came down quite a bit as the auto market continued to consolidate in 2011 impacted by high unemployment, low wage growth and contracting consumer spending. As a long-term investor I couldn't care less about short-term volatility. Core capital expenditures have grown steadily as has net borrowing activity. To be on the conservative side I forecast lower net borrowings in 2014 which contribute to FCFE growth. My estimate of 2014 FCFE yields $2.24 per share giving the shares an initial free cash flow yield of 13.56% and a P/FCFE multiple of 7.38. Those multiples are not astounding considering that GM trades at equally low earnings multiples/high earnings yields and Ford's cash balances are usually pretty high (see further below).

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Applying a discounted free cash flow valuation Ford's intrinsic value could reach $32.28 per share if operating cash flows can expand as estimated. As such, Ford has outsized upside potential of nearly 100%.

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From a market valuation perspective, Ford remains dirt cheap as well. The forward P/E ratio stands at nine. Ford holds about $36.7 billion in cash on its balance sheet as of June 30, 2013 (which is in line with $36 billion in cash at year end both in 2011 and 2012) equaling about $9.33 in cash per basic share. Ford's market capitalization of $65 billion consists to 56% of cash and marketable securities consistently sitting on Ford's balance sheet.

Summary

Ford remains a premier global car manufacturer with rebounding sales growth in the United States and strong demand from emerging countries which are likely to deliver incremental sales growth. Ford's F-Series provides meaningful upside potential for Ford. Investors who believe in a prosperous America in the long-term (which I do) might find Ford interesting. Ford's low earnings and free cash flow multiples as well as its high cash value per share make Ford an interesting long-term bet on the United States and Ford's leverage capabilities. Investors also purchase a 2.3% annual forward dividend yield which could increase in the future. Long-term Buy.

Disclosure: I am long GM, F, OTCQB:FNMA, AIG, MTG. 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.