I didn't expect to see this opportunity this soon - however it is already here. Ford (F) currently trades for less than $10 per share, giving it a P/E ratio that is even below the company's dividend yield. Of course there is no real metric comparing a company's P/E ratio with its dividend rate. However I don't expect to see many companies whose dividend rate is higher than its P/E ratio. Ford is one of these exceptions and this is just one of the reasons I increased the number of my Ford shares today.
Currently Ford's market value is $36.6 billion, whereas the company's cash holdings total $15.24 billion and it has many other liquid assets. In other words, Ford is cheap enough to buy itself out and go private in a short period of time. Of course, the company also has a total debt of $100 billion; however Ford is well on its way to shrink the debt. Besides, most of the debt is part of the Ford Financial rather than the Ford Automotive. In fact, due to its improved credit score, the company can issue new debt to cover the old debt and pay a much lower interest rate on it.
One of Warren Buffet's best suggestions is that when investors are buying shares of a company, they should think of it as if they are buying the entire company. This way, the investors would have a better idea of whether they want to buy stocks of a given company. Whether you are buying 1 or 1,000,000 stocks of Ford, think of it this way: if you had enough cash to buy the entire company of Ford, would you do it? My answer is a definite yes, given the company's strong balance sheet and cheap valuation.
Furthermore, one very important thing people usually forget is the quality of management team in a company. A team's leadership is hard to quantify and you will never see it in a company's balance sheet under "assets" even though it is probably one of the most important assets of a company. Many times, the leadership will be the determinant of whether a company becomes a cash cow or a cash burner. Many times, a strong rapport between the consumers and a company's leadership will bring in additional revenues, evidenced by the likes of Steve Jobs (AAPL). Alan Mulally is a great CEO and Ford is lucky to have him on board. He's experienced in manufacturing and he has turned the company around in the last few years.
In the short term, the company may see some weakness in Europe and South America, however in the long term, the opportunities in North America and Asia will more than make up for such weakness. In the first quarter of the year, the company posted a loss of $190 million in South America, Asia and Europe. This quarter, the number could easily pass $500 million according to the company. Of course, this doesn't mean that the company will not be profitable in the quarter. Analysts still expect the company to earn between 23 and 33 cents in this quarter due to the strength in North America.
The company sees different types of problems in different types of the world. In Asia, the problem stems from the fact that the company recently started new operations, built new factories and introduced new models. These are expensive investments that are likely to pay-off over a long period of time. In Europe, the problem is the weak demand as the Europeans are trying to save as much money as possible as the continent experiences a high unemployment rate that became chronic in the last decade.
The fact that Ford is seeing weak demand in Europe tells me more about Europe than Ford. It looks like the European economy will continue to shrink for a while as many Europeans either don't have money or choose not to spend it on new cars. New car sales in a region can usually mirror the economy activity in a region, and Ford is not the only car maker that is having trouble with selling cars in Europe. Earlier, GM (GM) also announced that the European market was very weak. In the next few quarters, both companies will decrease production in Europe in order to shrink their existing inventories in the continent. Currently Ford is only making use of 63% of its production capacity in Europe, and this number is likely to get even lower as we more forward.
Just a few years ago, Ford went through a restructuring in order to stop the cash burn and become profitable again. The plan worked in most regions of the world for the company. However Europe continues to be a headache due to the high labor costs and the low demand. The company will have to find a way to become profitable in Europe again. Some people suggest that Ford and GM should leave the European markets or minimize their exposure to these markets, however this is not likely to happen due to heavy investments by these companies in the continent over the decades. In Europe, the company could be more flexible and act faster in balancing its production with demand. I believe that many companies doing business in Europe will experience similar slowdowns and I don't expect the European economy to start growing anytime soon. The European economy is just not competitive enough compared to the emerging markets.
In conclusion, Ford will have to come up with a way to minimize its losses in Europe, however the company is still a strong buy. This year, the company is expected to earn $1.33 per share due to low demand in Europe being offset by strong demand in North America. I believe that Ford has every resource (i.e., leadership, balance sheet, portfolio of products, pipeline) to make things happen. Even before the last plunge, Ford was undervalued and now it is grossly undervalued. For those who have been waiting to initiate a position in Ford, this may be a good time. I increased my Ford shares on Friday after the share price dipped. My price target for Ford in the next 12 months is $12.
Additional disclosure: Ford makes up a larger percentage of my portfolio than GM.