Ford Should Be A Big Winner In 2012

Jan. 4.12 | About: Ford Motor (F)

On the brink of collapse, Ford (NYSE:F) needed to make bold moves. Rejecting government bailout funds, the company stream lined models, cut costs, and ultimately reduced its debt burden. The company has since reinstated their annual dividend, albeit a small one at $0.20, and is stronger now than it has ever been over the past decade. Trading around $11/share, Ford presents itself as a very attractive investment for 2012. A discounted cash flow analysis indicates that the company is trading at only a small multiple to future cashflows + cash.

Ford Discounted Cash Flow
5 Year Earnings Growth Estimate 6.90%
Discount Rate 20%
5 Year Forwards Earnings $5.33
Cash Per Share $4.33
Click to enlarge

Looking at the company's future earnings and current cash holdings, the stock has an intrinsic value of $9.66/share. While I disagree with the company reinstating their dividend, I personally think the funds should go towards paying down debts, the 1.86% dividend is enough to satisfy those income oriented, long term investors while not deteriorating the company's financial stability. The 6.9% growth rate used in the analysis above is one which I believe is modest given the companies ability to steal market share while Asian manufacturers (Honda, Toyota, Nissan) dealt with disruptions in their supply chains. Also aiding Ford sales this year will be a rise in competitor prices. Toyota has already announced that 2012 models of the Corolla, Tundra, as well as several cars in the Lexus lineup will all receive price hikes for the 2012 year. The company has also increased the price of their infamous Prius, a rate hike that can be anywhere between 2.0 and 4.7%. This represents a significant change during a time when competitors are releasing improved versions of their hybrids (think Ford Fusion) as well as several plug-in electric alternatives (think Chevy Volt). Ford has announced that their line of cars will increase an average of $117 above 2011 prices.

Overall market conditions are improving and with a stock price that I believe to be undervalued, Ford looks like a prime investment for 2012. My conservative price target on the stock is for it to trade at double the forwards earnings + cash, or $14.99/share while my high end price target will be for the stock to trade at $18.00/share. These price targets represent an approximate 36% and 64% premium to the current market price respectively.

Disclosure: I am long F.

Additional disclosure: I am currently long F call options and will be looking to augment my position over the coming month.