Despite the great amount of news and equity analysis conducted on Ford Motor Co (F), the market still offers tremendous opportunity for returns on investment; Ford is an exceptional bet for both the short and long term investor.
With a stable annual dividend yield of 1.86%, a current market capitalization of $40.8 billion, and 3-year CAGRs of 2.42, 46.93, and 38.76 (in revenues, net income, and earnings per share, respectively), Ford represents a phenomenal investment opportunity for investors with a wide range of objectives. Stunningly, its P/E ratio is around 2.25, in an industry with an average of 24.09 - compare this to the S&P 500's aggregate P/E ratio of 15.62. Finally, Ford's price to book is ~2.7. By all these metrics, Ford is hugely undervalued, and should be bought by the truckload.
The global automobile industry today has been greatly affected by the increase in oil prices; consumer demand has shifted towards fuel-efficient vehicles. Of the "Big Three" U.S. automakers - see GM (GM) - Ford has done the best job in adapting to this fluctuation in demand. By saving on raw materials costs, Ford has freed up capital to spend on quick, successful product introductions, new marketing campaigns, and gains in efficiency.
Furthermore, despite the surge in oil prices, demand for U.S. automobiles is comfortably high. The company is slowly but surely paying off its debt, and its fixed-income securities are supremely stable. CEO Alan Mulally has been a paragon of good corporate leadership, and stockholders had nothing but praise to offer at the most recent meeting; the news that he is staying on indefinitely is certainly a benefit for the company.
Essentially, the news over the last few weeks has been very good, yet investors have engaged in a selloff of Ford's equity shares - perhaps adhering to the old philosophy, "Sell in May and go away." Well, for the rest of us, this represents a powerful opportunity to buy at a discount and capture Ford's potential future value gains.
While high gas prices and falling luxury vehicle sales may affect performance in the short-term, the indication these more overarching signals give is that Ford is currently oversold, to great extent. As the economy improves, wealthy consumers who demand Ford's luxury products will return to the same levels of demand, and Ford will likely keep its customers who are turned off by gas guzzlers - as mentioned before, it's done beautifully in adapting to the market forces.
However, potential downside risks to bear in mind as you go about your own due diligence - especially from a short-term perspective: Continued and sustained economic stagnation, both in the United States and globally, could lead to inhibited sales; annual sales growth has been around -3% for the last few periods. Also, greater market volatility driven by Eurozone uncertainty could impact the short-term volatility of Ford Motor Co's equity shares. Still, especially if investing for the long-term, Ford will very likely overcome these factors to outperform.
Discounted cash flow analysis I've conducted puts Ford's implied value per share at $13.53, even with the most conservative assumptions. With baseline assumptions, DCF valuation yields a target price of over $15/share.
The most conservative valuation model places the implied price per share at $12.37; any of these represent a substantial premium of the current trading range in the mid-$10s. Analysts predict a consensus range from $11 to $21, indicating at the very least that there should exist a price floor somewhere around current trading prices.
Moreover, even if all of these signals are invalidated, Ford's return on equity over the last two years speaks for itself. In the first quarter of this year, Ford's RoE was 114.77%, compared to an industry average of 5.7% and 14.55% for the S&P 500. One year ago, in Q1 of 2011, Ford returned 289.65% on equity, compared to an industry average of 16.47% and 13.57% for the S&P.
The qualitative aspects of the automobile industry today, coupled with these hugely positive financial metrics, signal that Ford Motor Co is in a very healthy place. This is not reflected yet in its stock price, but my instinct is that a market correction will occur before the summer ends. Only time will tell - until then, I'm counting on my money being safe with Ford.
Disclosure: I am long F.
