In the eternal battle between value and growth, our so-called value stocks this year have performed the worst, while our higher valuation, more growth-oriented positions have performed better, despite the relatively constant market p/e of 12 - 13(x) forward earnings, at which the S&P 500 has traded the last 18 months.
On Tuesday, October 30, one of our dirt-cheap value stocks reports before the opening bell, with Ford Motor (NYSE:F) reporting their 3rd quarter financial results. (Thus far, despite Hurricane Sandy, Ford is still scheduled to report earnings Tuesday morning. If that changes we will update readers in the Comments section.)
Analyst consensus is expecting $0.30 in earnings per share on $31 billion in revenue for an expected year-over-year (y/y) decline in earnings and revenues of 11% and 1%.
Not including the dividend, Ford's stock is down 3% - 4% this year, after peaking at over $18 per share in February, 2011, versus the approximate 13% return on the S&P 500 year-to-date as of Friday, October 26th.
While Europe gets the majority of headlines of late, the fact is that all of Ford's non-US operations are struggling, and despite the US doing well, the US alone isn't strong enough to offset rest-of-world (ROW) weakness.
Here is a table of Ford's European operations as 1.) % of revenues, 2.) % of operating profit, and 3. Europe's operating profit margin:
To walk readers through the numbers, as a percentage of Ford's revenues, Europe has fallen from 28% to 22% of Ford's revenues (first column), as Ford Europe hasn't been profitable since the June '11 quarter, and Europe's operating profit margin has gone from low single-digits positive to mid-single-digits negative (third column).
Ford announced last week, that despite record US operating profits, Europe's operating loss will exceed $1.5 billion for calendar year 2012 (as of June 30, according to our spreadsheet constructed from Ford's earnings release and 10-Q, the European operating loss was $550 ml), so Europe has either gotten much worse, or Ford has used the 2nd half of 2012 to "kitchen sink" the region.
Meanwhile, the US is doing great: per the conference call this week, Ford's North American Auto operations are on track to generate $8 billion in pre-tax profit for 2012 (as of June 30, N/A operating profit was $4.1 billion), along with a record pre-tax operating profit margin. According to a research note out of Sterne Agee, this is the best performance since 1999, for the North American operations.
The point is North American automotive strength hasn't offset ROW weakness, with Europe an operating profit black hole, that has kept the stock mired in a trading range.
There is no question Ford's valuation is cheap: trading at 7(x), 6(x) and 4(x) 2012, 2013, and 2014 earnings per share consensus of $1.25, $1.45 and $1.78, the analyst consensus has changed little since the July report, and since last week's announcement. Analysts - as is usually the case - were out in front of modeling Ford's European woes before the official announcement. it seems.
The OEM's (both Ford and GM) typically trade at a p/e that is 40% - 70% of the S&P 500's so today's valuation is as the lower end of that discounted relative metric.
What continues to draw our eye is Ford's cash-flow valuation: In the 10-Q, the Automotive and Financial Services units are separated and Fords Auto unit alone is 5(x) price to cash-flow and 11(x) price to free-cash-flow.
It is hard to believe, but under a consolidated cash-flow statement F is trading at 3(x) price to cash-flow and 6(x) price to free-cash-flow as of June 30 numbers.
With a market cap of $39 billion and annual sales of $120 - $130 bl, the only time I've seen a price to sales metric as low as Ford's is Sears Holdings (NASDAQ:SHLD) when it neared $30.
Management has taken great pains to improve the balance sheet, improve cash-flow, start a dividend (the pay-out ratio is just 15% currently) and with a record North American pre-tax auto margin, under Mullaly, Ford has become a much better operator.
When we previewed Ford's 2nd quarter release, we noted that the stock needed to hold the $9 price level technically, which it did, and since the June quarter, F is up over 10%, despite more bad news on Europe. We think that the market is starting to discount ROW issues with Ford, and that Ford could use these problems to re-structure non-US operations, and thereby further position the company for the next phase of global growth (should that ever happen).
Technically, a trade above $11 is key for the short-term upside, and we wouldn't like to see the stock trade below $9.
Ultimately, we think Ford is capable of generating $2.50 - $3 in earnings per share, but it would require the ROW hitting on all cylinders economically, and the US would need to remain strong.