A Look At Whether Ford Is Firing On All Cylinders

Oct.10.11 | About: Ford Motor (F)

Shares of US Automaker Ford (NYSE:F) have fallen nearly 43% from its 52-week high reached at the beginning of this year. With it's new deal signed with the UAW, the company has essentially started a new era with its workers, but it's too early to tell how it will all work out. With those labor negotiations now in the rear view mirror, I wonder if the company is doing all that it currently can. Let's take a look at some products first, and then we'll take a look at the financials.

The problem I see with Ford right now in terms of products is that they are lesser quality for a higher price. I'll use the example of the Ford Fusion (manual) versus the Hyundai (OTC:HYMLF)Sonata (manual). If you'd like to do the same comparison, click here. Both manuals are the base models. The MSRP and "comparably equipped pricing" have the Fusion about $200 more with no incentives. The Sonata has an extra 23 horsepower, a lower turning radius, and more interior space and room for occupants. And the gas mileage: Sonata gets 24/35 while the Fusion gets 22/32. And the Sonata's gas tank is a gallon bigger so you can go even further.

According to Consumer Reports, the Sonata also has better crash test ratings, better acceleration, better braking, and a better warranty. So I'll sum everything up. The Sonata is a much better car, will cost you less in fuel and maintenance, and is safer. And you can get it for the same price. That's a no brainer to me. For those of you who may question this example, I also observed both of these cars at the New York International Auto Show earlier this year. I was more impressed with the Sonata.

That's just one example based on similar cars. I provided that comparison just to show you the one main thing Ford needs to do: build a better quality car at a better price. That may be easier said than done. However, if you look at the competitors page on Yahoo Finance, you will notice that Ford has higher margins than both Toyota (NYSE:TM) and General Motors (NYSE:GM). Good for them. They need to keep it going though, and right now, there is a ton of competition. So my main point is that Ford will be a winner if they can control their costs and increase quality. We'll see how this deal with the UAW works out. But for now, why not focus on how Ford has done recently. Here's some selected financial data over the past eight quarters.

Selected Financial Data ($B) 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011
Revenues $30,892 $35,449 $31,566 $35,067 $29,893 $32,428 $33,114 $35,527
Gross Profit $5,716 $5,717 $6,427 $7,239 $5,660 $5,177 $6,338 $6,274
Net Income $997 $868 $2,085 $2,599 $1,687 $190 $2,551 $2,398
Current Assets $62,222 $55,865 $59,456 $53,787 $59,371 $48,875 $51,279 $50,030
Total Assets $203,106 $194,850 $191,968 $179,750 $177,078 $164,687 $167,391 $168,086
Current Liabilities $70,360 $61,193 $60,056 $59,674 $61,100 $60,206 $62,076 $62,686
Total Liabilities $210,376 $201,365 $197,405 $183,291 $178,818 $165,329 $164,926 $162,736
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As you can see, the company has done fairly well, and has reduced the size of its balance sheet quite a bit over the past 2 years. So let's look at some financial metrics, and we'll focus on profitability first.

Profitability 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011
Gross Margin 18.50% 16.13% 20.36% 20.64% 18.93% 15.96% 19.14% 17.66%
Operating Margin 2.89% 2.14% 5.32% 7.41% 5.26% 2.50% 7.50% 6.25%
Profit Margin 3.23% 2.45% 6.61% 7.41% 5.64% 0.59% 7.70% 6.75%
Return on Assets 0.49% 0.44% 1.08% 1.40% 0.95% 0.11% 1.54% 1.43%
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Gross margins have come down in the year over year numbers, but operating margins have been quite decent despite those declines. Profit margins have also faired fairly well, as well as the return on assets ratio. I excluded the return on equity ratio from this analysis because the company has had a negative shareholder's equity book balance for seven of the past nine quarters, so the numbers look a bit distorted. We'll look at liquidity and coverage next.

Liquidity 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011
Current Ratio 0.88 0.91 0.99 0.90 0.97 0.81 0.83 0.80
Quick Ratio 0.79 0.82 0.89 0.80 0.86 0.71 0.71 0.69
Working Capital ($B) ($8.14) ($5.33) ($0.60) ($5.89) ($1.73) ($11.33) ($10.80) ($12.66)
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Coverage

3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011
Debt Ratio 103.58% 103.34% 102.83% 101.97% 100.98% 100.39% 98.53% 96.82%
Cash Debt Coverage 7.44% 7.79% 1.35% 3.39% 5.65% 0.72% 1.51% 3.80%
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Both the current and quick ratio have come down from last year's levels, but have stayed fairly even over the past couple of quarters. I don't like how the working capital number has gotten worse, but as I said before, the company has reduced the size of its balance sheet. Also, I'm not as concerned with the short term numbers getting worse, because the long term numbers have gotten better.

The debt ratio, or liabilities to asset ratio, has improved every quarter. Ford has essentially reduced its long term liabilties, shifting some of them to short term liabilities in the process. I like what it is doing here, and I hope it can keep it going. The final check will be some activity ratios.

Activity 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011
Receivables Turnover 4.43 4.76 4.35 4.70 3.66 4.12 4.04 3.85
Inventory Turnover 3.83 4.95 4.28 4.50 3.75 4.27 4.02 4.05
Asset Turnover 0.15 0.18 0.16 0.19 0.17 0.19 0.20 0.21
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The receivables turnover has declined a little, meaning that Ford's accounts receivable are growing faster than its revenues. It's not a problem yet, but if the number starts moving closer to 3 it might bring up a little concern. The inventory turnover has remained fairly strong, which is a good sign that it is getting its products out there and sold. Their asset turnover has definitely improved, meaning they are doing more with less. I'd like to see this improvement continue.

So, where is Ford going from here? Well, it is projected for 14% revenue growth in 2011 and 7% revenue growth in 2012. Unfortunately, it doesn't look like it will be translating that growth to the bottom line. EPS estimates call for only 1% growth this year, and about an 8% decline next year. Like I've said before, it needs to control its costs. At a forward P/E of 6, it is trading at a premium to GM's forward P/E of 5. Ford has a slight advantage in revenue growth expectations, while GM has the advantage in EPS growth. And right now, the analysts like GM a little better, but say Ford has more upside.

So what's my overall opinion now? I would rate Ford a short term hold with a medium to long term buy. Ford just reached an agreement with the UAW, and it remains to be seen how that will work out. Also, despite gas prices being down about 25 cents in the past month, they are still up 60 cents year over year. Ford has been pushing its more fuel efficient cars lately, but it still trails some of its international counterparts in fuel economy.

I like the balance sheet work it has done, and I like the profitability, but it needs to continue. But right now, I'm not sold on the US economy and the unemployment picture. In my opinion, that will probably pressure the shares for the next couple of months. However, I think this is a great stock for a period of economic improvement. Remember, it did go from under $2 to $19 after we climbed out of the recession. For now, it needs to get those long term liabilities under control, keep costs in check, and improve quality.

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