Over the past 10-years Ford Motor Company (F) has been a staple for the domestic investor. However, since the financial crisis unfolded almost 3-years ago and the government was forced to take unprecedented action, Ford was labeled with a black eye of sorts. Well my friends, I have come to the conclusion that the bruises have healed, and we could see Ford easily over $20 a share in no time. Additionally, after further investigation, I have determined it may be possible for Ford to start distributing dividends in the near future. Let us begin with a top down approach to the automotive industry, starting with a macro view of a few important indicators, working our way down to Ford's recent results.
The first macro-economic indicator that is vital to the automotive industry is non-revolving credit, which is published courtesy of the Federal Reserve. Each month, the Fed releases the G.19 report, which details Consumer Credit outstanding. In particular, the data shows outstanding credit for both revolving (credit cards and such) and non-revolving (mostly auto loans) credit. The series that best represents the increased desire for automotive loans is the non-revolving series, seasonally adjusted of course. Keep in mind that this series is composed of outstanding credit for mobile homes, trailers and vacations, but the point is still the same. After declining for more than 2-years, non-revolving credit outstanding has moved to the highest level on record. This is certainly a welcome sign, especially among auto-dealers since most of their sales are made on credit. It appears consumers have stepped back into the market for cars, and with such style and sophistication out there, why wouldn’t they? As the economy continues to improve, this series will push north as well, as demand for automobiles continues to rise.
(Click charts to enlarge)
The chart below displays automobile sales on a month-to-month basis. Car sales are at their highest level since the 'cash for clunkers' program back in 2009. The trend is clearly moving higher, and with interest rates at all times lows, I see no obstacle that prevents a strong performance of auto sales in 2011. In particular, demand for Ford vehicles was 27% higher this past month than January 2010, even though Mercury has been discontinued. With gas prices on the rise, you can bet consumers are looking for fuel-efficient vehicles. With 4 brands of cars that get 40+ mpg, Ford is ahead of the pack in terms of efficiency. Additionally, Ford has designed hybrid, plug-in and all electric cars. Granted, I'm not sold that these types of cars will be the next Mustang, or even be remotely popular for that matter. However, this does demonstrate Ford's ability to engineer and innovate in many different ways, clearly distinguishing itself from the competition.
Now let's move on to the stock itself. Below I have posted a chart with some recent price action. The very bottom part of the chart shows the relative strength index, or RSI. The RSI is a very popular momentum indicator which interprets the price of the stock as overbought when the index is above 70 and oversold when it is below 30. Currently, the RSI rests at 41.39, signaling there is room for price appreciation. Additionally, volume (the middle chart) has surged over recent days, but this is related to the earnings reports. Last week, the price broke above its 50-day simple moving average (green line), which can also be interpreted as a bullish sign.
At the end of January, Ford released its preliminary 4th quarter and 2010 results. The company reported net income of $190 million, down significantly from $696 million a year back. EPS were $0.05, which missed analysts' estimates, and in turn the stock moved sharply lower. However, the reduction in net income is related to a $960 million completion of debt conversion, which will reduce the amount of debt outstanding by almost $2.0 billion. Additionally, Ford prepaid an outstanding VEBA note, leading to a total debt reduction of $14.5 billion in 2010. Ford reported a positive net cash position for 2010 of $20.5 billion, down slightly from the prior quarter, but as mentioned before, this is related to debt reduction measures. With the strong 2010 performance, the company announced a profit sharing plan with about 41,000 employees. Overall, as strong financial performance continues through 2011, the dividend talk will continue to heat up, which in turn should boost the stock price.
Now let's move on to the dividend. I have presented past dividends paid by the company. The last dividend paid was on June 29, 2007. Come this summer, 4 years will have passed since that last payout. Historically, this is the longest time frame in which Ford has not issued a dividend. However, I think this streak is going to come to an end within fiscal year 2011. The amount of excess cash that will be saved via prior and future debt reduction, coupled with strong auto sales, will be more than enough evidence for the Board to reconsider distributing dividends. While I sincerely wish I could present future ratio and cash flow projections, Ford has only filed its preliminary statements, which made it difficult for me to obtain data. However, no excuses play like a champion. So this article will serve as an introduction for a future commentary, which will be more financial statement savvy, and I will attempt to project future cash flows. Ford is expected to subject its finalized statements at the end of the month, so keep a look out in early March.
All in all, Ford Motor Company is on the up and coming. The company will benefit from strong auto-sales in 2011, and improved demand across the globe. Ford isn't just a presence in the US, but a major global company that will profit from economic strength, especially in Asia. As the company continues to operate at a profit, improving its cash position modestly, it is my opinion that it will begin to distribute some of these earnings to shareholders. Stay tuned for a future report.