Ford Looks Like a Deal at These Levels

| About: Ford Motor (F)
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Ford Motor Company (NYSE:F), which competes with Daimler, General Motors and other auto manufacturers, recently announced that it would pay $3.8 billion in cash to the UAW Retiree Medical Benefits Trust and reduce its total debt by $4 billion.

Despite these positive signs and despite the fact that the company’s Q1 results beat estimates, Ford’s stock has declined by nearly 15% in the past three months. We attribute much of this slide to investor jitters about the slow U.S. economic recovery, and we believe that Ford’s stock is a good buy at current levels of around $10.50. Our analysis follows below.

Valuation Highlights

In its announcement, Ford explained that it had the option of paying 50% of its retiree pension obligations in stock but chose cash instead, implying strong underlying business performance. If Ford’s business continues along this trajectory, its cost of debt could potentially decline in the future, boosting the company’s stock. You can modify the discount rate and create your own estimates to see its impact on Ford’s stock price.

Our forecast implies a valuation of $39.2 billion for Ford’s automotive business. We value Ford’s financial services business at around $12.4 billion, yielding a combined enterprise value of $51.6 billion. Ford’s net debt is around $8 billion, taking into account cash from the sale of Ford’s Volvo division, investments and long term securities, along with pension and automotive debt. This yields an implied per-share value 0f $12.90.

Caveat: There’s a downside risk for Ford if U.S. automotive sales come in lower than expected this year. Most automakers predict total sales of 11.5 to 12 million vehicles for 2010, according to the Associated Press.

Disclosure: No positions