Why Ford Shares Are A Big Buy Now

Nov.14.11 | About: Ford Motor (F)

Ford (NYSE:F) is the motor company that didn’t cost the American taxpayer billions in bailout money. If the taxpayer were not sure about this fact, then the commercial that was never shown, but has received a huge amount of coverage because it was pulled, would have cemented that fact. At this financially sensitive time, when taxes may have to rise, credit is tight, and banks and loan institutions are under pressure, maybe the management of Ford wanted to remind its customers of its financial strength. Of course the publicity surrounding the pulled commercial also served to remind prospective customers of other car manufacturers that took bailout money – including main rivals Chrysler (now part of a group majority owned by Fiat) and General Motors (NYSE:GM) – that Ford did no such thing.

Moody’s, the rating agency, raised its credit rating of Ford on October 27, to Ba1 – the highest non investment grade level. It also gave a positive outlook on the company, and analysts now expect it to regain investment grade status as early as the first half of next year. This upgrade followed Standard and Poor’s upgrade to BB+ from BB-.

The company’s financial arm, Ford Credit, posted net income of $350 million in the third quarter of 2011. This was amongst results that showed a third quarter net income for the company as a whole of $1.65 billion. At the time of the report, Ford’s management said it continues to seek to cut its debt to less than $10 billion by 2015. It currently stands at around $12.7 billion. It is also concerned with keeping costs under control, and has made good progress with this aim by signing a four year deal with United Auto Workers.

Ford’s revenue increased by 10.6% in the third quarter from a year earlier, whilst GM’s increased by 18.70% However, return on assets at F are a little better than at GM (3.09% versus 2.75%), though profit margins are a little lower (5.06% versus 6.78%).

Ford’s earnings over the last year are $1.67 per share, and this places the shares (currently trading at around $11.10) on a trailing price to earnings ratio of 6.68. Analysts expect a slight fall in net earnings per share for its next fiscal year (ending Dec 2012) to $1.63 as competitive pricing from GM, Toyata (NYSE:TM), Honda (NYSE:HMC), and Nissan (OTCPK:NSANY) take its toll. TM, in particular, may be aggressive as it seeks to recover market share after many model recalls and negative press.

Forward price to earnings ratios at F, GM, and TM are 6.83, 5.37, and 14.64 respectively.

Ford is a company whose house seems to be in order. Whilst there will be pricing pressures that could impact revenue going forward, it has taken several steps to combat this ahead of time. It is cutting debt, and has gone a large way to keeping its internal costs under control. Ratings agencies have recognised its positive management with regard to its finances and business model, and are raising credit ratings accordingly. Profits are being made in its financing business, and its vehicle sales business.

Ford is a well-managed company. Shareholders in F have benefited from a sizeable out-performance when compared to the shares of GM over the last five years. The shares are languishing at the bottom end of their 52 week range of $9.05 to $18.97, though this is perhaps more to do with the wider economy than company fundamentals. Companies that have strong management, stabilizing costs, and a strong market presence and brand name, will be the winners in the current economic malaise. Ford is one of these.

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