Ford's Valuation: 2009 All Over Again

| About: Ford Motor (F)
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Summary

Backing out cash per share, the stock trades at a forward multiple of 3.5.

Extreme pessimism usually produces outsized returns.

Reinvest your dividends for enhanced returns.

  • Record sales - check.
  • Stable dividend - check.
  • Special dividend - check.
  • Increasing cash flow YoY - check.
  • Increasing earning per share YoY - check.
  • Selling more than the leader - check.
  • Increasing share price - Unchecked. Will it ever be?

In fact, Ford Motor Co.'s (NYSE:F) stock is down about 20% since April 2015 when it reached a high of $16. No matter what Ford does, the market seems to have a different set of questions. If the China sales numbers are good, then Europe numbers are brought into question. If Europe numbers are good, then US numbers are brought into question. If the US numbers break 10 year records, it's still seen as not having met the expectations. Ford, the company keeps winning, but Ford, the stock just cannot.

As bad as 2009?

Sure, there are concerns of things slowing down but are the signs bad enough for the stock to trade at a 2017 forward multiple of 6.50? Backing out $6 in cash per share, the multiple drops to a depressing 3.50. Those who have been investing since at least 2008/2009 will recall Ford trading at similar depressing levels right after the market crash when the stock reached as low as $2. We aren't arguing that buying Ford here will give investors a similar return (8 bagger and 30% yield on cost). But at nearly 5% yield and a low single digit multiple, the stock is priced for a disaster. However, the rest of the market isn't priced that way as evidenced by the run up in February and March.

Management:

Speaking of 2009, it is easy to forget that Ford did not declare bankruptcy, unlike the other two big players. Sure, Ford did get a big loan but the fact is it didn't have to flip the pages to see the dreaded Chapter 11. That thought should be comforting for those want to be prepared for the worst case scenario.

The management is also being prudent by cutting costs and not overspending on the dividends. Keep in mind that Ford did not increase the quarterly dividend from 15 cents per share but only declared a special dividend at the beginning of the year. While investors almost always want an increase in their regular dividends, sometimes companies need to keep the overall long-term interest in mind.

Business remains strong:

Make no mistake about it, all the major markets that affect Ford's sales (US, Europe, China) are consumerist in nature and unless things get very depressing for the economy, it's hard to see a disastrous drop in sales to match the concerns we had in 2009. Speaking of the US in specific, interest rate and gas price are two critical macro factors that affect car sales. The Federal Reserve's intent to keep rates low and increase it slowly (if at all) will encourage more people to take out auto loans. Lower gas price adds fuel to the fire [pun intended], although we are starting to see the usual spike as summer nears. The critical F-Series is still going strong, newer models are in the pipeline for the higher margin segments, and mustang is going strong with a new model expected as well. Overall, the activities don't seem to match those of a company whose stock is priced for a repeat of 2009.

What if you buy here?

But, what if one buys here at $13 and the stock indeed tanks? Let's do some numbers to find out. Now, if you believe Ford will go down and stay down forever, don't read this section. However, if you believe Ford will stick to its cyclical nature, this section should comfort you.

Assumptions

  • Annual dividend per share remains constant at 60 cents. This seems reasonable given the free cash flow strength. Even if the average free cash flow drops by 50%, Ford should have sufficient free cash flow to cover the dividend. Ford needs about $600 million/qtr to cover its dividends [at the rate of 15 cents for 4 billion shares]. The average of the last five years has been $1.5 billion/qtr and the 2015 number was even more impressive at an average of $2.25 billion/qtr. Click here to verify this.
  • Dividends are reinvested for the long-term.
  • Share price drops by 20%/yr in 2017, 2018, and 2019 and then go up by 10%/yr as part of a recovery. Typically, recovery is slower than a fall and hence the lower assumption.

Results

  • Over 10 years, this experiment yields an annualized return of 7%/yr, entirely due to accumulating more shares when the price is down.
  • Obviously, the returns will be higher if Ford increases dividends but let's leave out that scenario to counter the other possibility of dividends being cut.
  • In addition, when valued so low, a company needs to surprise to the upside only a little to enhance returns to shareholders.

Conclusion:

We understand that auto manufacturers have been on a roll over the last few years and things are bound to slow down. However, Ford's valuation almost never kept pace with the increase in sales. As a result, when things are slowing down just a tad, the valuation reeks of bankruptcy. The stock is also at a critical support level as can be seen here. Over the last two years, the stock has found strong support at $13 and slightly below.

Ford remains on our watchlist and as we accumulate more cash, Ford will be one of the stocks we will be looking to buy. What do you think about Ford's future? Please leave your comments below.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.