By Matt Doiron
Auto sales have not been great lately, and that's been bad news for Ford Motor (F). While Ford's market share showed a slight recovery in its most recent quarter, it still had a US market share of only 15.6%, down from 17.3% in the second quarter of 2011 and obviously far down from the company's glory days. It, General Motors (GM), and now-private Chrysler suffered severely from the U.S. financial crisis and recession, and while Ford did not receive as much government assistance and did not take as much of a PR hit as the other two companies the automaker has still struggled since then.
Geographically, North America is Ford's strongest segment. The company actually recorded a slight increase in its North American revenue and operating income compared to the second quarter of 2011, and the same is true for the first half of 2012. It was in the rest of the world where Ford encountered problems. Revenue in Europe fell from $9.0 million to $7.1 million, generating an operating loss of hundreds of millions of dollars; margins in South America collapsed to near zero; revenue rose in Asia-Pacific-Africa, but Ford still ended up with an operating loss as costs rose more quickly.
Ford offers a set of attractive quantitative metrics for being a value stock. Its market capitalization of $34 billion gives it an implied EV/EBITDA multiple of 3- lower than the valuation often given to smaller companies, even small businesses, in riskier industries. Its trailing P/E is 2.Though these low valuation multiples can be explained by an expectation of shrinking earnings- on a forward basis, the P/E rises to 6- over a longer time period the fall in earnings is not expected to be to a great enough degree to justify the low stock price: the five-year PEG ratio is about 0.7.
Offsetting this appealing valuation is a pair of significant negatives for the auto industry. First, it is tied to macro performance - observe the decline in European operations as the economy has weakened there - and questions are being raised about the sustainability of the U.S. economy in the face of a worldwide slowdown in growth. Second, Ford, like many other large U.S. manufacturing companies, has large pension liabilities and related benefit payments to make to current and past workers and their families.
Ford's American-based rival General Motors is its closest publicly traded peer, and ever since GM IPO'd in late 2010 the stock price movements have been highly correlated - at the moment, both are down between 40% and 50% since then. GM also trades at mid-single digit P/E multiples and a PEG well below 1, and its enterprise value is actually even with its trailing EBITDA.GM's recent quarterly results have been slightly more concerning than Ford's, and clearly most deal with the same industry-related issues, but it like Ford seems like a good value stock. This may be why it placed as one of the ten most popular stocks among hedge funds according to the most recent set of 13F filings in March.
But Ford had its supporters in the hedge fund community as well. Jonathon Jacobsen, an ex-Harvard Management employee who currently runs Highfields Capital Management, initiated a 34.6 million share position in the first quarter of 2012 (see other stock picks from Highfields Capital Management). Billionaire David Tepper's Appaloosa Management also reported that it initiated a position in its 13F, of 6.5 million shares (find more of David Tepper's favorite stocks).
Ford also competes with foreign auto companies such as Toyota (TM) and Honda (HMC), which also face concerns about auto sales in a global economy that may not grow as quickly as in the past but which may have less worries about retiree obligations. These companies have fairly high trailing P/Es but they have managed strong earnings growth in their most recent quarters compared to the same period in the previous year, and Wall Street analysts expect them to improve their earnings: their forward P/E ratios are in the same territory as Ford's and GM's.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
