Warren Buffett has described investing as simple, but not easy. Ford (F) is a classic case. It’s simple to determine some sort of rational valuation level based on fundamentals, but it hasn’t been easy to buy and hold the stock this year. Shares trade only slightly higher than they did one year ago after looking over the abyss in 2009 and then nearly reaching $19 only six months ago. With Ford’s earnings set to come before the bell on Thursday morning, let’s take a closer look at the automaker.
First, the simple part. We can look at the most recent financial results and draw conclusions from them, but we also want to know where Ford is going and what their potential is. I worry less about the next quarter and more about the next few years. With a 2010 EPS of $1.59, they’ve got a trailing P/E of only 8.2. Their Q1 2011 EPS was $0.61. Analysts expect $1.89 for full year 2011. That gives them a forward P/E under 7. That’s cheap, but that’s not what I’m concerned about. P/Es don’t mean much for cyclical companies.
What I’m concerned about is their market share and U.S. auto sales. I want to see whether these earning are peak or trough. Let’s just forget about overseas sales for now. That’s a bonus I’m not going to calculate. Look at the average U.S. auto sales from the past four years:
- 2010: 11.8 million
- 2009: 10.6 million
- 2008: 13.5 million
- 2007: 16.5 million
The 2011 estimate is between 12.5 and 13.5 million. These last few years are bad. Historically bad. Consider this: The average annual sales from 1980 to 2010 is 14.8 million. In 1980 there were fewer than 227 million people living in the U.S. Today there are more than 308 million. So, in 2011 nearly 2 million fewer automobiles will be sold than what the average was over the past 30 years, even though the country has 35% more people. Cars last longer today, yes, but still. Apart from 2008 to 2010, this year's sales estimates haven’t been this low since 1992. If we’re conservative we can say that normalized annual sales are 14.5 million.
Ford’s market share was 16.4% in 2010, which means they sold 1.935 million autos. Their market share is trending up in 2011, but let’s forget about that increase for now. If we take 16.4% sales in a normalized year, Ford sells 2.378 million cars in the U.S., 23% more than today. What this tells me is that we’re in a trough, and Ford is performing extremely well in this trough.
I haven’t even looked at Ford’s impressive sales in Asia, where sales are skyrocketing in China and India. And, I haven’t talked about the savings they’re getting by paying down so much debt so quickly. In Q1 2011 they paid down $2.5 billion of debt. Since the beginning of 2010 they’ve paid down $17.5 billion. That’s nothing less than incredible.
Now, the hard part. Ford’s shares are down about 25% since the start of the year. If you held them since then, you’re hurting. The U.S. economy is in shambles. Credit is tight. Unemployment is high and will remain high for a long time. Taxes will be going up. That normalized sales environment looks like it will never come. Psychologically, it’s tough to put a lot of your money in an American company that relies on American consumers. That’s why investing isn’t easy. All of these emotions are overwhelming. The case to own Ford is simple with the numbers above. Actually buying and holding shares is not easy.
Turn the emotions off. Ford has been gaining market share in an improving sales environment. The EPS estimates don’t take into account the increase in sales that will come in two to three years. What happens when Ford reinstates their dividend and starts buying stock back? That will happen in 2012, but the market will begin discounting it later this year. This stock is significantly undervalued at today’s price.
I don’t know what Ford is worth, but I do know that I’d feel comfortable putting it in my portfolio and forgetting about it for three years, and I felt the same way when shares traded at $16 in late January.