By Jeff Jan Darling
Ford Motor Company (F) has seen it share price idle at around $10.00 for the last few trading sessions. Based on the recent release of a positive third quarter financial report, the stock price accelerated, but then stalled on thinner trading volumes and market pessimism making short term gains difficult to achieve. Threatening headwinds in Europe combined with unstable commodity costs may continue to exert downward pressure on the stock. However, going forward into 2012, Ford plans new model introductions utilizing hybrid electric technologies in addition to its strategic partnership with bigger rival, Toyota (TM), to develop advanced gas-electric hybrid engines for trucks. Though not currently paying a dividend, Ford CEO Allan Mulally has offered the prospect of reinstating the dividend “sooner rather than later.”
Investors are missing key components of the Ford strategy. First, it is managing its debt incredibly well. Ford has been able to steer through a challenging economy without government help unlike rival General Motors (GM). Though GM has made a positive recovery to become a formidable competitor in domestic automobile manufacturing, Ford has been successful in managing its debt aided by a low interest rate environment, as well as working compatibly with its labor force. Improving sales, a low interest rate environment and competent management have systematically reduced the debt burden carried by the company. With a reduced debt burden, the company has widened free cash flow and operating cash flow metrics. In turn, the company has been able to reinvest more in its brands and should eventually begin returning cash to shareholders in the form of dividends.
Second, on an operating basis, Ford outperforming its peers. Trading near 52 week lows, Ford and its American rival, General Motors, are both coming off a relatively healthy third quarter. Ford boasts the highest gross margin at 14.83%, General Motors follows with 12.18%, and the larger Toyota trails at 11.31%, though the entire automotive industry benchmark is running at 19.59%. Ford outpaced its rivals with a quarterly revenue gain of 10.6% on 6% rise on October 2011 sales.
Third, Ford shares are cheap. With a p/e ratio of a 6, Ford’s earnings are more well priced than the auto industry’s average of 7.3. The price to earnings growth ratio (peg), the p/e ratio divided by the company’s projected growth rate for the next five years (a figure under 1.0 indicates fair pricing) at .76 indicates a good value. Ford shares are currently trading at almost 8% below its 13 day moving average. This seems to be driven more by macro forces in the market rather than overvaluation and makes the current trading prices worth watching for a possible entry point.
Fourth, Ford is leading the way in innovation, particularly in the energy-efficiency space after earning the top award for six straight years. The company has a great intellectual property team and, as a company, R&D dollars are well-spent. Ford continues to drive sales with improved and innovative product design. Already an industry leader in the truck category with its legendary F150 series, Ford is engaged in a strategic partnership with Toyota for development of advanced gas electric hybrid truck engines. Hybrid gas electric versions of both of Ford’s popular models, the Escape SUV and Ford Fusion, are selling in the marketplace now. An all electric version of the well-received Focus passenger car is slated for introduction as a 2012 model. Two additional electric plug-in models are set to debut next year under the C-MAX banner.
Additionally, not to forget it roots, Ford pumped up the design on the 2013 Mustang, its iconic muscle car first introduced in 1964.
Investors do not see that international growth is the forward catalyst for Ford. With just under 3% market share in Asia, Ford is planning to increase its number of dealerships in China and India in order to capture a larger share of these dynamic markets. Ford has demonstrated sales strength in compact cars with the success of its Fiesta models there. The financial outlook in the Eurozone and another economic softening in the United States could tap the brakes on sales and see the stock price drift lower. I think India is the key to Ford's international success. In India, capacity growth is likely to double and then double again over the next few years. Ford has an early lead in the country and thus its numbers are working off of a larger base. Other companies are posting greater growth, (such as TM, with 90% sales growth) however, in nominal terms, Ford is way ahead of its competitors with 50% growth on an already large base for its Figo model. Driving ahead, Ford is well positioned to continue its steady and measured success with continued improvements to its balance sheet driven by sales from a forward-looking, innovative product line. The venerable company’s solid worldwide brand coupled with steady thoughtful management and the prospect of a dividend make Ford a good blue chip portfolio hold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.