Built Ford Tough, Regardless Of Asia

Jan.11.12 | About: Ford Motor (F)

Yesterday Ford (NYSE:F) CFO Lewis Booth announced the company would experience a loss in the Asia Pacific region. But CEO Alan Mulally reaffirmed the company's guidance of $0.26/share. If this news of a loss in the Asia Pacific market concerned you or made you wary of investing in Ford, it shouldn't. The company has the bulk of its business in North America with only fractional exposure to Asia in comparison.

Moving forward, we've already seen that analysts have been well off in predicting sales growth and I believe the same holds true for earnings growth numbers. Current estimates are for the company to grow earnings at 6.9%, I believe the company could see growth more along the lines of 8% in the near term and finishing off the five-year period around 6%. Using my estimates, I've done a new Discounted Cash Flow analysis using these new numbers, with the earnings growth rate decreasing 0.50% with each consecutive year. I've used a 20% discount rate which is based upon the company's outstanding debt with an average coupon rate of 8% and the stocks beta of 2.37 relative to the S&P 500. The results are shown below:

Ford Motor Company (F) Discounted Cash Flow Analysis
Year Earnings Growth Rate (%) FY Earnings Present Value of Earnings
2012 8% $2.02 $1.68
2013 7.5% $2.17 $1.51
2014 7.0% $2.32 $1.34
2015 6.5% $2.47 $1.19
2016 6.0% $2.62 $1.05
Click to enlarge

The sum of the present value of future earnings comes to $6.77/share. Add back to this number the cash the company has on hand ($4.33/share) and we see that the company has a minimum intrinsic value of $11.10/share. This implies that the stock trades at a modest premium (9% above) to intrinsic value. At this point if you aren't long Ford, you may want to wait to see the stock pull back. Since the turn of the new year, the stock has only had a single down day, and on that day it was only down a penny. I already maintain a long position. However if there is a pull back to the intrinsic value of $11.10, I would consider augmenting my position.

As for how to play the trade, I am long the January 2013 Calls at the 12.50 Strike with a premium of $1.50/contract. I am long these contracts because I believe Ford will exhibit significant strength in its upcoming earnings announcement and will continue to grow market share in the U.S. throughout 2012.

Information regarding Ford Press releases was obtained through the Ford website. Bond coupon rates were obtained through Morningstar, and market information for option prices were obtained through TDAmeritrade.

Disclosure: I am long F.

Additional disclosure: I am long Ford Call options with expiration in February 2012 and January 2013. I will look to build my position on dips in the market.