With just three weeks left in the quarter, and the SP 500 up 27% year-to-date, Ford (F) has been a noticeable laggard since early July '13, when the stock traded back over $17, and then has churned in a range between $16 - $18 for the last 6 months.
There are 4 trends which are unmistakable at the company:
1.) Monthly auto sales have accelerated and the Ford F-150 Truck is setting near record sales, dating back to the late 1990's. The truck is a higher-margin product for F, thus margins and profitability are being helped by F-Series sales;
Graphs and commentary compliments of Bespoke:
Sales of pickup trucks are often a sign of strength or weakness in the small business and construction sector as these types of businesses are the most common users of these vehicles. With that in mind, today's November numbers from Ford regarding F-Series sales are another strong positive signal. During the month of November, sales of the F-Series totaled just under 65,501, which represented a 16% increase over November of last year and was the highest November reading since 2004. Additionally, there have only been five months since 1996 where November sales were as strong.
Following November's sales totals, sales of F-Series trucks totaled 689K YTD through November. This represents the highest year to date total through November since 2006's level of 725K. Friday morning's news from Ford implies that the US economy, and more specifically small business and construction, is continuing to improve.
2.) Cash-flow is robust and has grown with the improvement in auto sales, but Ford has also become a more efficient manufacturer. Here is F's historical cash-flow data
|Combined 4q trailing CFO||$13,792||$12,817||$4,961||$10,223||$9,532||$10,402||$10,591||$11,773||$12,518||$11,732||$10,946||$10,160||$9,789||$9,418|
|Combined 4q trailing FCF||$7,278||$6,569||$4,505||$4,764||$4,800||$5,941||$6,276||$7,501||$8,382||$7,620||$6,858||$6,096||$5,730||$5,364|
|quarterly share repo||($77)||$77||$10||$31||$31||$31||$31|
|quarterly capital allocated||$317||$470||$402||$222||$222||$222||$222|
|4q trail div||$1,370||$1,167||$965||$764|
|4q trail share repo||$41||$149||$103||$124|
|4q trail capital allocated||$1,411||$1,316||$1,068||$888|
|Capital returned as % of FCF||19%||20%||24%||19%|
|Capital returned as % of auto FCF||70%||75%||403%||110%|
Even with Ford's 55% debt to capitalization ratio, Ford might get to the point where they could repurchase stock on a regular basis.
3.) Europe is improving - no question. In 2013, Ford originally guided to a $2 billion or $500 million per quarter pre-tax income loss for Europe, which would have amounted to $0.50 per share for 2013. Instead, through the first 3 quarters of 2013, Europe's pre-tax loss was just a little over $1 billion, and from a guidance perspective, Europe is performing much better-than-expected. Part of it is the stabilization of the European economy, but part is also that Ford is executing in terms of sales, far better than the overall European auto market.
Europe is the only geography that continues to operate at a pre-tax loss of $1.038 bl year-to-date, or about $0.25 per share. Thus if Europe would only breakeven, the 2014 estimate could be increased to $2.10 from the present $1.85.
(Financial Services lost $600 ml on a pre-tax basis in the 3rd quarter of '13, with nothing in our notes on it. I wonder if that was interest-rate related.)
4.) Finally, while Microsoft (MSFT) has seen the "Mullaly Premium" in its stock since Alan's name surfaced as the next MSFT CEO, there has been less chatter about the "Mullaly discount" around Ford. If Mullaly does leave F, and the stock gets hit, we'd be a buyer. Ford is a long-cycle business and while Alan has had a tremendous impact on the company, the products for the next few years are already in place, and the improvement Ford has made in quality and execution, can't be eroded overnight.
Our intrinsic value estimates for Ford haven't changed, i.e. between $22 and $25 per share. Our internal model values Ford at $22, while Morningstar puts an intrinsic value around Ford at $26. If the US can continue steady growth, and the other geography's of the world can grow steadily, and margins not erode, then the stock could easily trade to $25.
We think core EPS for F as the company currently stands is over $2 per share.
Technically, what is a little worrisome for F is that the stock could not take out its January, 2011 high of $18.75 - $19, despite the fact that Ford's EPS in 2011 was $1.51 and in 2013 are expected at $1.66.
Since the 2008 recession, here is the history of Ford's EPS and revenue generation:
Ford's EPS and revenue history since 2008
|EPS||y/y gro||Rev's ($bl)||y/y gro|
2013 will be the best year of EPS and revenue growth of the last 5. According to the above chart, if the stock should drop to $15 for any reason, whether it is a Mullaly departure, market correction, or higher interest rates, we'd be a buyer at that level.