I had the privilege many years ago of visiting the Henry Ford museum just outside of Detroit, MI. As think back on that trip, I can't help but draw comparisons between Henry Ford and the late Steve Jobs.
The automobile changed the world at that time. Before Ford's (NYSE:F) assembly lines, there was no such thing as drive-In movie theatres or drive-thru restaurants. There was no such thing as interstate highways or freeways. Imagine what the automobile did for the economy at that time.
Just as the iPhone has made the world a lot more connected today, the automobile brought folks together in a way that has only grown since. My iPhone is black, while Henry Ford's cars came in any color, as long as it was black. The best part of this story is that just as folks have to have the latest version of the iPad or the iPhone today, trade-ins for the newest, latest automobile became a part of our culture from that point forward.
Today Ford is a very mature company, but still innovating, while Apple continues to change the world with new products. Apple has been one of the greatest stocks of our generation and the company continues to produce almost obscene growth and profits. Ford, on the other hand has now returned to four straight years of profitability, after three straight years of losses.
Today Ford reported earnings that were good, but did not meet the expectations of the street. Does this create a buying opportunity in the rebounding shares? Remember, Ford was a $1.00 stock as recently as 2009 and it is now just over $12.00. The stock did hit a high of almost $19.00 per share one year ago and is now down over 30% since that time.
I analyze the stock of Ford just like I would any other stock. I first begin with the track record of the stock:
Data from Best Stocks Now App
Owners of Ford's stock have had a wild ride over the last decade! Over the last ten years, the shares have delivered an average total return of just 0.4% per year, while the S&P has done slightly better than that with a whole lot less volatility.
Consider that during the decade the stock ranged between $1.00 per share and $18.00. Wow, fasten your seatbelt! Consider that the stock was down a whopping 66% in 2008, but also realize that Ford has averaged an average return of 87.5% per year over the last three years!
Remember too that Ford did not need a government bailout in 2008, nor did the stock go to zero like General Motors did. I am also a believer in Ford's current CEO, Alan Mullaly. Overall, Ford earns a performance grade of "B-" over the last decade when compared with almost 2,700 other stocks. It's safety grade as a stock comes in at "D."
Now that we have examined the track record and safety record of the stock, let's move on to it's current valuation:
Ford currently has an unfavorable PEG ratio with a forward PE of 8.25 and an expected five year growth rate of 9.70%. Growth investors like to see these numbers reversed with a Forward PE lower than its growth rate. Now let's go a step further and establish a five-year target price for the stock.
In my years as a professional money manager and analyst, I have found 6-12 month target prices to be basically useless. I like to look out on the horizon a bit, and then watch the company's progress along the way.
If we take next year's earnings estimates of $1.55 per share and extrapolate them out at the consensus growth rate of 9.7% over the next five years, we come up with potential earnings of $2.24 at that time.
In watching automakers trade over the years I have watched their PE ratios range between 6-10. Automakers are cyclicals, they are not fast growing tech stocks that get glamorous multiples. I am using a multiple of 8.5 on $2.24 of earnings to calculate a five year target price of $18.07 per share.
This means that the stock only has 49.3% upside potential over the next five year. By the way, this upside potential also includes the dividend that Ford pays which currently computes to a dividend yield of 1.6%.
I like to buy stocks that have 80-100% or more upside potential over the next five years. Ford falls way short of this at the current time. Ford only gets a value grade of "F+" right now. The fact of the matter is this: the stock was way ahead of itself when it was trading at $18 per share last year at this time. It should come as no surprise that the stock is down over 30% since then
Even with the sell-off of the shares over the last twelve months and more today, I choose to still pass on the shares of Ford. Ford only gets an overall grade of "C+" right now and is ranked at 1,507 out of 2,674 stocks. Sorry, but I like to maintain a straight "A" portfolio!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.