Ford (F) shares traded as high as $18.97 earlier this year as up-beat revenue and earnings forecasts from the company excited investors.
Alan Mullaly continues to pay down debt and produce cars that consumers want. The constraints in auto parts supply from Japan should ease over the next few months as manufacturing activity picks back up. This spring's market share gains by U.S. automakers, including Ford and General Motors (GM), will leave a lasting mark at the expense of Toyota (TM). Ford is still trading at a very low $14-15 per share, well below where it could trade a year from now. On a discounted cash flow basis, shares will be worth just under $30 apiece in 2012. EPS for 2011 is forecast at 113% with a five-year projection of nearly 13%. Broad trends suggest that Ford is stealthily improving its position in the competitive landscape: a consolidation of brands, a gain in market share over the past year and the shedding of debt.
On this last point, it was just announced that Ford will redeem, in cash, all 6.50% convertible trust preferred securities, effectively taking $3 billion in debt off its books and reducing total debt to $16 billion. As the next two earnings announcements loom, these dual events could act as a catalyst to bring Ford's stockprice nearer to fair value. We use an 11% discount rate for the company.
While the stock has significant appreciation opportunity, we prefer straight call options. The $15 strike price in August, September, and December of this year, and January of next year offer outsized reward for the risk.
|Call Options||Strike Price at 15.00|