This article is about putting Ford's (F) company performance into perspective. It compares the last 5 years of an aspect of company's valuation, namely EBITDA, to that of its competitors in an effort to evaluate Ford's ability to sustain its profitability. The article also zooms in to the last reported quarter in order to gain a more current insight. In the conclusion it summarizes the points the investors should be wary of and look for in the coming reports when considering the stock or the company's future results.
Maybe one of the biggest puzzles the novice investors in the Ford stock face during the current year are the reasons behind its price movements. Despite the significant increase of Ford's net income for 2011 the company's stock experienced almost an uninterrupted downfall since the release of the annual report. Company's net income for 2011 increased by 208% (to $20.21B) compared to the previous year. Still the stock finished last week at $10.18, a level which is 18.56% below the price it had when the report was published ($12.50 as of Feb. 21, 2012). For the same period S&P 500 gained 5.2%. What are the possible explanations for this decline in price?
Among the available answers is the fact that almost 60% of the net income for 2011 was due to recorded benefits on income taxes (about $11B) which in general is a one-time event and is not expected to reappear soon. According to Ford's 2011 annual report:
If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, we record a valuation allowance.
At year-end 2011 the company decided that it is more likely than not that there will be future profits against which the deferred tax assets to be realized. As a result it released almost all of the allowances which were set aside during previous years.
Because of such tax considerations or other management discretion opportunities that generally exist, it is often helpful to expand the investors' arsenal of evaluation tools in order to more clearly understand the future perspectives of a company.
One such non-GAAP tool is EBITDA. It often serves as a comparison tool between competitive capital intensive companies. EBITDA cleans the net income from the effects of the capital structure (interests paid), the tax structure, the management choices of depreciation or amortization methods. The measure should not be used alone but it could be helpful in gaining an understanding of the fundamental value of a company before its earnings are distributed to creditors, preferred shareholders and common shareholders.
There are two methods of deriving the EBITDA.
- EBITDA = Net Income + Tax expense + Interests expense + Depreciation&Amortization (1)
- EBITDA = Revenues - Expenses (excluding depreciation and amortization, interests, taxes and unusual expenses) (2)
For the purposes of this analysis we will use the second method because it clears out the effect of any unusual income/expenses which in the case of Ford comprise a significant amount in several years of the examined five years period. Marketwatch's page for Ford financials provides a value of EBITDA calculated by the second method. The source of those values is FactSet Fundamentals so it is considered to be reasonably reliable. Therefore, for the sake of simplicity and time constraints, we will use the data available on Marketwatch in the rest of the article, if not otherwise stated.
Having explained the EBITDA meaning and calculations, please consider the following table which shows EBITDA values for Ford Motor Co., General Motors Co. (GM) and Toyota Motors Corp. (TM). In order to be comparable, the Toyota values are recalculated in US $ through the USD/JPY exchange rate as of the end of March in the year following the year represented in the table. The use of the following year is due to the fiscal year of Toyota being April - March so the years in the table for Toyota should in fact be read plus one, i.e 2007 is 2008, etc.
We see that Ford's EBITDA in 2011 is lower than the one in 2010. Digging into the 2011 annual report we notice that while the revenues grew with 5.7% in 2011 and SG&A expenses stayed virtually the same, the costs of goods sold excluding depreciation and amortization grew faster - with 9.7%. This hurts the profitability of the business and shows the company did not managed to successfully transfer all of the increased material costs to customers.
The yearly changes in EBITDA of the three companies are shown below.
The range of changes in values seen in the table above, is the smallest for Ford (132.59), followed by Toyota (244.05) and General Motors (299.37). This presents the Ford's performance concerning EBIDTA as the most stable one in the examined group of peers. The company shows not so volatile performance than its main U.S. rival and its average yearly change is also positive. Having in mind the troubles and the bailout the GM went through these results are not surprising. It should be noted however that for 2011 General Motors exhibits a positive change in EBITDA while the Ford's EBITDA deteriorates.
Toyota also shows a positive average yearly change in EBITDA (in USD). It is higher than the Ford's average change but mainly due to the significantly larger value measured in Toyota's fiscal 2010. Similar to the GM data, the Japanese company shows a better EBITDA value in its last fiscal year ended in March, 2012. Toyota's results however are an example of how misleading the EBITDA could sometimes be, especially considering short term results. Even that we see an increase in the measure for the last year, the company's 2012 net income in JPY is about 30% lower than the one recorded in 2011. This is due mainly to a higher proportion of tax expenses relative to the pretax income.
The EBIDTA data from the two tables above show that Ford is exhibiting a more stable historical performance than its rivals. The company however might face some troubles ahead in increasing its profitability. Add this to the one-time effect the released revaluation allowances had on the net income and we could to a great extent explain the direction the Ford's stock price took during the current year.
The Last Quarter (Q2 2012) Results
In order to gain a further insight into the current condition of the company let us take a look at the last available quarterly report. The relevant values are shown in the table below:
We see there is a negative change in EBITDA in the last reported quarter compared to the result from an year ago. Most of the decrease comes from the 16% increase of the proportion the selling, general and administrative (SG&A) expenses take in revenues. The proportion of costs of goods sold also increased but with the modest 1%. This is among the warning signs the investors should look for in the coming Q3 report and later in the annual one. Given this tendency of deterioration of EBITDA continues, a further assessment of the ability of Ford to sustain the profitability of its main business could be needed.
On the other hand, given the factors that increased the 2011 bottom line, investors could reasonably expect that Ford's 2012 EPS will be significantly lower than the 2011 result. This means the P/E of about 2.3 which is associated with the Ford's stock trading at $10.18 will be a history which could hardly be repeated soon. Indeed, the analysts estimates provided by Yahoo! Finance, Marketwatch and Businessweek show figures for EPS 2012 in the $1.26-$1.27 range. This sets the Ford's forward P/E ratio near 8 ($10.18 / $1.27 = 8.02) which is a bit higher than the GM's forward P/E calculated in the same way (7.86). According to this General Motors currently seems a bit undervalued compared to Ford.
Positive EPS surprises from the coming quarterly report could not be completely ruled out as 70% of the 98 companies that reported earnings to date for Q3 2012 in the U.S. have reported higher earnings than the estimates (Source: Factset). If such a surprise happens and it is not accompanied by an improvement in the overall business results of Ford, including the company's revenues and EBITDA on annual basis, this would only come as another warning sign concerning the company's future perspectives.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.