The ModernGraham approach to investing has multiple layers to it. Regular readers will be familiar with the first two steps; the first is to determine if the company is suitable for the Defensive Investor or the Enterprising Investor, and the second is to compare the price to the intrinsic value through quantitative analysis. The next step in the analysis is to review the company's management and other qualitative factors to determine how the company may compare to other companies that pass the first two steps. In this Company of the Week series, we will delve into more detail about a specific company that performed well in the first two areas. This week, the company chosen, Ford Motor Company, is the most undervalued out of all 225+ companies in the ModernGraham database.
Results of Recent Valuation
Feel free to review ModernGraham's latest valuation of Ford in detail, or read this summary:
Ford Motor Company remains unsuitable for the Defensive Investor due to its lack of stability in earnings and dividends over the ten year period. The Enterprising Investor looks at a much shorter time horizon, though, and the company passes all of the requirements of this investor type. As a result, Enterprising Investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods will feel comfortable proceeding with further research.
As for a valuation, the company performs well in the ModernGraham valuation model after growing its EPSmg (normalized earnings) from -$3.60 in 2008 to $2.23 for 2013. This solid level of growth is not reflected by the market, as the market is currently implying a growth rate estimate of -0.82%. In other words, the market price indicates an expectation that the company's EPSmg will shrink by 0.82% annually over the next 7-10 years. Clearly this assumption is not supported by the historical achievements of the company, and the ModernGraham valuation model accordingly returns an intrinsic value estimate that exceeds the market price.
Price trend compared to S&P 500
In the following chart, you can see that in the last five years, Ford has significantly outperformed the market, but in the second chart you can see that over the ten year period, Ford has trailed the market. While Intelligent Investors will know that price trends are not determinative of value or opportunity, they can be helpful in comparing Mr. Market's behavior toward the company with the valuation. With Ford, it is evident that Mr. Market has turned much more interested in the company in recent years.
F data by YCharts
F data by YCharts
Price to Book Value
Another metric I find interesting with Ford is to look at the Price to Book value trends. In the next graph, the price is charted along with the price to book level. It is a little concerning that as the price has risen in recent years, the asset level has not grown with the price. This is shown because the price to book level has been rising along with the price. If asset growth was keeping up with the price, one would see a more stable price to book level.
F data by YCharts
Dividend Rate & Yield
Dividends are a very important part of any analysis of a company, as they not only indicate management's willingness to return value to shareholders, but they also indicate an opportunity for the Intelligent Investor to gain a return on the investment outside of capital appreciation. In the next chart, we can see that Ford has been raising its dividend in the last few years, and even though the price has been rising considerably, the dividend yield has also been growing. Right now the dividend yield is 2.63% based on the actual dividends of the last 12 months, and 3.1% based on an assumption that the latest quarterly dividend will be the same going forward.
F Dividend Yield (TTM) data by YCharts
To me, Ford appears to be a very solid opportunity for value investors. The company qualifies for Enterprising Investors, the quantitative analysis using one of Benjamin Graham's formulas indicates the company is significantly undervalued, and the dividend yield is outstanding. Further, as an owner of a Ford Fiesta, I believe Ford is on the right path in terms of product development. While there are parts of the vehicle that I'm not completely sold on, it does seem to be a significantly better product than many vehicles coming from American automakers of the last 15 years. The era of the giant gas-guzzling SUV seems to me to be in the past, and the great recession has brought about a move towards a desire among consumers for much higher fuel efficiency. Ford appears to get that, considering my Fiesta averages over 38 mpg.
Warren Buffett has promoted looking at some key management tenets, and I'd like to leave it up to readers to discuss how Ford fulfills (or fails to fulfill) these qualities. Please discuss the following in the comments below:
- Is the business simple and understandable?
- Does the business have a consistent operating history?
- Does the company have favorable long-term prospects?
- Is management rational?
- Is management candid with shareholders?
Disclosure: The author held a long position in Ford Motor Company (NYSE:F) at the time of publication and had no intention of changing that position within the next 72 hours.