ModernGraham Valuation Of Ford Motor Company

Feb. 24, 2015 7:59 AM ETFord Motor Company (F)24 Comments
Benjamin Clark profile picture
Benjamin Clark
5.71K Followers

Summary

  • Ford is suitable for Enterprising Investors, but not Defensive Investors following the ModernGraham approach.
  • According to the ModernGraham valuation model, the company is undervalued at the present time.
  • The market is implying 0.33% in annual earnings growth over the next 7-10 years, which is significantly less than the growth the company has seen in recent years.

Ford Motor Company (NYSE:F) has significantly trailed the market over the last several years, which will immediately intrigue many investors. However, Benjamin Graham, the father of value investing, taught that investors must take emotion out of the equation, as the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment's merits. Here is a look at how the company fares in the ModernGraham valuation model.

The model is inspired by the teachings of Benjamin Graham, and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.

In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another. By using the ModernGraham method, one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries.

F Chart

F data by YCharts

Defensive Investor - Must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise - Market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - Current ratio greater than 2 - PASS
  3. Earnings Stability - Positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record - Has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth - Earnings per share has increased by at least 1/3rd over the last 10 years, using 3-year averages at the beginning and end of the period - PASS
  6. Moderate PEmg (price over normalized earnings) ratio - PEmg is less than 20 - PASS
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor - Must pass at least 4 of the following 5 tests or be suitable for a Defensive Investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 - Current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt-to-Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - Positive earnings per share for at least 5 years - PASS
  4. Dividend Record - Currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $16.38
MG Value $68.89
MG Opinion Undervalued
Value Based on 3% Growth $25.95
Value Based on 0% Growth $15.21
Market Implied Growth Rate 0.33%
Net Current Asset Value (NCAV) -$7.18
PEmg 9.15
Current Ratio 2.01
PB Ratio 2.64

Balance Sheet - December 2014

Current Assets $155,052,000,000
Current Liabilities $77,141,000,000
Total Debt $79,999,000,000
Total Assets $208,527,000,000
Intangible Assets $0
Total Liabilities $183,722,000,000
Outstanding Shares 3,994,000,000

Earnings Per Share

2014 $0.80
2013 $1.76
2012 $1.42
2011 $4.94
2010 $1.66
2009 $0.86
2008 -$6.50
2007 -$1.38
2006 -$6.72
2005 $0.77
2004 $1.52

Earnings Per Share - ModernGraham

2014 $1.79
2013 $2.23
2012 $1.80
2011 $1.30
2010 -$1.15
2009 -$2.57

Dividend History

F Dividend Chart

F Dividend data by YCharts

Conclusion:

Ford Motor Company does fairly well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the inconsistent dividend history and lack of earnings stability over the last ten years, while the Enterprising Investor has no initial concerns. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company's intrinsic value.

When it comes to valuation, it is critical to consider the company's earnings history. In this case, the company has grown its EPSmg (normalized earnings) from a loss of $1.15 in 2010 to a gain of $1.79 for 2014. This is a strong level of demonstrated growth, which is well above the market's implied estimate of only 0.33% annual earnings growth over the next 7-10 years. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market's implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.

This article was written by

Benjamin Clark profile picture
5.71K Followers
Benjamin is one of TipRank's top bloggers.  He is the founder of ModernGraham.com, a value investing website devoted to the study and modernization of the teachings of Benjamin Graham.

Disclosure: The author is long F. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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