Whenever a bullish article on Ford Motor Company (F) is written on Seeking Alpha, those that are bearish on the company always bring up the argument that "if the market sees Ford as being worth below $10, it must be worth below $10."
Many Ford bears seem to see the market as a 100% accurate measure of the "true valuation" of a company. They believe that there is no way market might be wrong about Ford's value, and if one happens to disagree with them, they tend to say "so you know the value of Ford better than millions of investors and experts?"
Before I get into this argument, I would like to present my past arguments regarding Ford. On February 14, 2012, I wrote an article saying that Ford was fairly valued. Back then, Ford was trading for $12.53 and many of the authors thought that Ford was well on its way to $17 to $20 per share. Back then I said that the company was fairly valued and the upside was limited.
Then on April 27th, I wrote another article about Ford and it wasn't completely bullish either. In that article, I mentioned how Ford's stock price was tightly tied to expectations regarding the overall market, and how Ford wouldn't see $15 per share until S&P 500 Index sees 1,500 points. Later on, I wrote another article saying that the patient investors of Ford would get rewarded, however it would take a long time before this happens.
And now, I believe that Ford is grossly undervalued. As Ford kept losing value in the market, I moved from having mixed feelings to being cautiously optimistic and now to fully optimistic. Even if the company posts no growth in the next year or two, it should still have some upside as the company is undervalued at the moment.
Now going back to the argument, I don't believe that market is always right about valuation of companies. I can give tens, if not hundreds of examples supporting this argument. For example, market thought that Facebook (FB) was worth $81 billion on May 17th. Only a couple weeks later, the same market started to "think" that Facebook should be only worth $55 billion. Today, the market thinks Facebook is worth $67 billion. If the market was always right about valuations of companies, we would have very little volatility in the market. Yet, we have plenty of volatility most of the time.
There are also examples like Amazon (AMZN) and Netflix (NFLX) where the market can't seem to make up its mind about how much a company is worth. I would think that millions of investors and experts would have decided on value of these companies already, right? Speaking of experts and investors, analysts have an average target price of $15 for Ford; the target prices range from $12 to $17, indicating a potential upside of 25% and 75%.
In my previous article about Ford, I mentioned how Warren Buffet said that when investors are buying stocks of a company, they should look at it as if they are buying the whole company. Now let's say we have $37 billion, just enough to buy Ford. Would we buy it?
Ford has cash holdings of $15.24 billion at the moment. In addition to this, the company has net account receivables of $69.89 billion. Furthermore, the company's current inventory is worth another $7 billion. Ford's total long-term investments and other liquid assets are worth a total of $37.22 billion, whereas the company's assets are worth $182 billion.
Of course, the company is not free of debt; however, the debt is long term and the company has absolutely no trouble of paying the debt off. In fact, the company is able to reduce its interest rates by refinancing due to its improved credit score. Buying a company with cash holdings of $15 billion and liquid assets of $37 billion, excluding inventory and account receivables, for a total of $37 billion definitely implies a deep discount.
Now, let's look at Ford's earnings potential. The 15 analysts covering the stock believe that Ford will earn between 98 cents and $1.65 per share this year. The analysts also believe that Ford will earn between 97 cents and $1.88 per share next year, and between $1.58 and $2.05 in the following year.
In the worst-case scenario, the company will earn $3.53 and in the best case scenario, it will earn $5.58 in the next three years. So basically, if we invested $37 billion to buy this company, not only would we get assets worth way more than $37 billion, but we would also rake-in profits between $13.48 billion and $21.32 billion in the next three years alone. I don't know what Mr. Market thinks, but I think it's a great investment. Not many investments would result in such a great return on investment.
Of course, not many of us can actually afford to buy Ford Motor Company as a whole. I was just applying Mr. Buffet's principle to Ford to see if it's a buy or not. At its current valuation, Ford is a screaming buy. In fact I am really surprised that the company isn't using its cash reserves to buy some shares back, as it could easily buy nearly half of the outstanding shares at the moment.
Disclosure: I am long F.