- Many analysts are very bullish on Ford even though investors don't always agree.
- Ford's current valuation is in line with the company's historical valuation.
- There may be significant upside once the European issues are fixed and Asia is at full potential.
- The company's current cash position and forward valuation offers limited downside risk for investors.
Ford (NYSE:F) is one of those companies where you see a great discrepancy between what the analysts think and what investors think. In the last couple years, we heard nothing but bullish words from the analysts, while investors mostly ignored these analyses and continued to keep the company's shares weak. As a result, this company's stock chart looks like a staring contest between analysts and investors.
When I talk about analysts, I am talking about both professional analysts who cover the Ford stock as well as the amateur analysts you see on the internet (many Seeking Alpha contributors would also fall into this category). I am not saying that one group of analysts are better than the other group, and this is one case where both groups tend to agree with each other. Whenever you write an analyst report or an article about Ford, it always talks about how Ford's shares should be trading for a lot higher than the current price. On the investors' side, they vote on the stock using their money and the stock tends to perform in ways that disappoint a lot of these investors.
Don't get me wrong, anyone who's bought shares of Ford before 1995 or between 2008 and 2010 made some money (in addition to other periods) if they held their shares till now. There were also times a lot of people lost a lot of money on Ford, such as those who bought in 1999 and held through the Great Recession of 2008. Still, as a company, Ford is doing a lot better than how it was doing for much of its history and its stock should also follow the same pattern, right?
Ford is doing a lot better compared to five years ago. However, there is still room to improve for the company. For example, the company's current revenue of $147 billion is surely a lot better than just north of $100 billion at the peak of the recession. However, the company was generating about $175 billion in 12-month periods before the recession. It looks like a lot of investors are waiting on the sidelines for Ford to improve its revenues closer to their pre-recession levels before buying up the shares. This will probably happen once Ford's Europe shows significant recovery since the company's North American unit is already performing at levels close to the pre-recession levels. Keep in mind that by the time Ford solves its problems in Europe and reaches the same revenue figures as in 2007, it may be too late to buy the stock since the stock market is forward looking.
Speaking of revenues, Ford's price to revenue ratio has been on the decline in the last several months. Notice that Ford always had a low price-to-revenue ratio and this metric has been pretty volatile over the years. Notice that in the early 1990s, Ford's price to revenue ratio was as low as 0.10 and it peaked just north of 0.30 before the decade was over. In the earlier part of 2000s, the highest value we saw was 0.40 and the value we saw just above 0.60 last year was one of the highest, if not the highest, in Ford's history. This shows us one of the two things: either Ford's stock price has been punished by the investors for a long time or the company usually enjoyed very thin margins where sales did not matter all that much.
Next, we'll look at Ford's historical margins. In the last decade, Ford's gross margin ranged from about 6% to 21% with current value sitting just south of 15%. The company's operating margin ranged from -15% and about 6% with the current value sitting at nearly 5%. Finally, the net profit margin ranged from -13% to nearly 15% with the current number at 4.87%. As Ford enjoys some tax benefits, its net profit margin is higher than its operating margin, which is rare. So, what do these numbers tell us? Well, Ford's gross margin has been on the decline since 2011 even though it is doing a lot better compared to the recession figures. This is mostly due to currency exchange rates, European issues, high cost of materials and recently increasing car incentives. In the long term as the one-Ford plan gets going and the company becomes more efficient outside of North America, its gross margin should increase and move closer to 20%.
The company's operating margins have also been on the decline but they are still doing well compared to historical figures. In fact, Ford's current operating margins are a lot better than anytime during the last decade with a couple exceptions here and there (for example 2011, but that spike was caused by a spike in gross margins). Ford is currently going through a restructuring in Europe as well as heavy investments in Asia and these have been keeping the company's operating margins depressed for a while. Once Europe recovers and Asia performs at or near full potential, Ford's operating margins have the potential to move closer to 7-8%.
Now, let's take a closer to look at Ford's valuation. First we will look at the company's earnings multiples. Notice that the chart below has a big gap because Ford has been unprofitable for the most part of mid-to-late 2000s. When the company was profitable, it usually enjoyed low valuation from the market with the exception of a few small periods. Currently, Ford's price-to-earnings ratio of 8.60 (twelve-trailing-months), normalized P/E ratio of 9.74 and price to operating profits ratio of 8.94 look roughly in line with the company's historical standards. It looks like investors were always cautious about valuing Ford since the company is in a cyclical industry that is heavily dependent on the state of the consumer market as well as material costs.
When it comes to price to free-cash-flow, Ford is enjoying a valuation that is a little higher than where it was during the last decade. Again, this could be due to the company's heavy cash investments in Asia, restructuring costs in Europe and the pension payments made by the company in the last year, as all of these items affected Ford's free cash flow negatively.
So, where will Ford go from here? Well, compared to the last decade, Ford is in much better shape even though there is plenty of room for improvement. As you can see below, Ford generated $7.16 billion of net income and $6.89 billion of operating income in the last year, and Ford's profitability is catching up with the pre-recession levels even though the revenues aren't there yet. By the time the company's revenues reach the pre-recession levels, we can expect the profits to pass those levels significantly.
Investors are currently waiting for Ford to fix things in Europe and reach its full potential in Asia even though it may be too late to buy the shares once those two things happen. I am not going to assign a price target to Ford and it all depends on how well the company accomplishes its goals in the next couple years. However, it's worthy to note that there is very limited downside from here unless the world economy goes through another major recession. Ford currently enjoys nearly $10 billion in net cash (in its automotive unit) and once we exclude this figure, the company actually enjoys a historically low earnings multiple. Many analysts expect Ford to pass $2.00 per share in net earnings by either 2015 or 2016, and this will give Ford a pretty low forward earnings multiple. If Ford reaches pre-recession revenues with a net profit margin of 5%, it will be generating nearly $9 billion of net profits, which is very realistic in the long term.
Still, without giving any price targets, I am pretty optimistic of Ford in the long term.
Additional disclosure: I may buy more shares and/or calls if the price falls below $15 and additional shares and/or calls if the price falls below $14.