Is Ford Undervalued?

Apr.28.14 | About: Ford Motor (F)

Summary

The EV/EBITDA multiple shows that the stock is undervalued.

Growth in the emerging markets and the global strategy should allow the company to enhance its revenues.

Poor earnings for the quarter are a small hitch and the long-term growth story is intact due to the growth in emerging markets and the launch of new models.

Ford (NYSE:F) has come a long way from the slump it faced after the credit crunch of 2008, when the stock price went down to around $1.80 per share. A change in the strategy has helped the company gain value over the last five years and the stock is currently trading close to $16 per share. In our previous articles, we have discussed the strategy and the growth for the company, and we will not touch on those topics in this article. The scope of this article is the valuation of the stock based on a very important metric - and the comparison with some of its peers. As the company also announced its earnings, we will also touch on the financial performance of Ford.

Valuation

For the valuation of the stock, we are using enterprise value and EBITDA multiples of the company. Enterprise value is the value that a prospective buyer will have to pay for the whole company. This measure values the business of the company instead of just valuing the company. I believe this measure provides a better picture than the market capitalization as it also includes the debt of the company. If a buyer were to take over a company; he/she will have to assume the debt of the company as well and the buyer will get the cash and other liquid assets of the company, which can be used after the takeover. In order to calculate the enterprise value, we add debt, preferred share capital, and the minority interest to the market capitalization of the company, and deduct cash and cash equivalents - the resulting value is the enterprise value of a company.

According to the calculations, the current enterprise value of Ford is around $123 billion, which is on per share basis equals $30. Currently, the stock is trading at approximately $15 per share, substantially below the enterprise value of the stock. However, as enterprise value adds debt, preferred capital and the minority interest to the market capitalization; the enterprise value will typically remain higher than the market price. A better metric is the comparison with the earnings before interest, taxes, depreciation and amortization (EBITDA).

Moreover, in order to compare different players in the sector, a better measure of the EV/EBITDA multiple is available for comparison. The EBITDA value for the company stood at around $17.15 billion for the last year. The EV/EBITDA multiple for the company stands at around 7x. EV/EBITDA ratio is a better measure in stock valuation as compared to P/E ratio since it is not affected by the changes made in the capital structure of the company.

In the table given below, we have compared EV/EBITDA multiple of Ford with some of its peers. The multiples for General Motors (NYSE:GM), Honda (NYSE:HMC), and Toyota (NYSE:TM) are given.

Ford

General Motors

Honda

Toyota

EV

$123

$68

$108

$298

EBITDA

$17

$15.83

$10.69

$24.79

EV/EBITDA

7.23x

4.25x

9.82x

11.92x

Click to enlarge

Source: Morningstar, SEC Filings and YCharts

According to the table, the EV/EBITDA multiple of Ford is higher than its biggest local industry market competitor, General Motors. However, the other two industry peers are trading at a higher EV/EBITDA multiples than Ford. Moreover, according to the table, the industry average is close to 8x, leaving the multiple for Ford lower than the average. A lower EV/EBITDA multiple usually indicates a stock is undervalued. We can say that Ford is undervalued compared to Toyota and Honda, but overvalued compared to General Motors.

The profitability of Ford is also supporting the company valuation with a substantial increase in the profits during the last year. Moreover, the operating margin for the company has gone up to 5.6% from 4.7% over the year. The company is also taking certain measures that will prove to be profitable in the coming quarters - the launch of 23 models is one of these measures. Furthermore, the Ford is also focusing on developing models that can be sold all over the world without major changes - this should further allow the company to manage its costs and increase profitability in addition to the effective implementation of its global strategy.

A Glance at the Earnings

The recent earnings release for the company did not impress the market as the stock lost about 3% after the announcement. The company reported net income of $989 million, which showed a decrease of $622 million with earnings per share standing at $0.25 compared to $0.31 for the same period last year. As I have mentioned in my previous articles, the harsh winter impacted the sales in the North American markets. Also, Ford reported a large one-time expense (warranty costs) which resulted in a decline in its earnings. Moreover, the company lost share in the American market while wholesale volumes fell by 2.4% to 717,000 vehicles and market share was down around 0.6% to 15.3%. However, Ford managed to gain a stronger position in the Asian market. With the launch of 23 new products this year, Ford should see increased sales as the growth in the emerging markets has been extremely strong for the company.

Conclusion

The EV/EBITDA multiple indicates that the stock is undervalued at the moment. There are a number of positives for the company: for example, the growth in the emerging markets and a stronger position in Asia, and the recovering local markets. Furthermore, the decision to make its models in line with the global demands will allow the company to bring down its costs as these models will be made with slight changes for the global markets. This will allow the company to achieve better operational efficiencies and grow its bottom line.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.