Recommending Ford: A Contrarian View (F, GM)

Includes: F, GM
by: Asif Suria

Recommending Ford at this point is very unpopular, but from a contrarian or value standpoint, Ford could reward investors who are willing to go against the grain. Ford and General Motors are losing market share and face many other problems such as rising healthcare costs, but with an extremely low P/S of 0.08 and current P/E of 7.52, Ford looks heavily undervalued. I could be wrong about Ford and investing in Ford at this time does involve considerable risk but it is hard to discount the following positive things that Ford has going for it:

  1. Ford currently has $36.8 billion in cash and short-term investments on its balance sheet. With that much cash on hand, the likelihood of Ford going bankrupt looks slim to me. The long-term debt is $141.74 billion, but a large portion of that is debt on account of the car loans given out by the finance arm of Ford.
  2. Ford owns Jaguar, Land Rover, Aston Martin and Volvo. While the Jaguar unit of Ford has not performed well in recent years, each of these impressive brands represents solid value. Last week Ford decided to inject $2.1 Billion into its troubled Jaguar unit. Ford also owns Mercury, and a considerable stake in Mazda.
  3. Ford recently sold its stake in Hertz for $5.6 billion. I was unaware that Ford owned a big stake in Hertz Car Rentals but was pleased to hear of the sale as it infuses a lot of cash into Ford and at the same time gets rid of a car rental company that seems to consistently charge almost twice the rate of its competitors.
  4. Unlike GM and a host of other automakers that did not see the importance of adding hybrid engines to their lineup of cars, Ford quickly followed in the footsteps of Toyota and Honda to introduce a hybrid version of its popular small Escape SUV. The New York yellow taxi company has already started using some hybrid Escapes and plans to convert a large part of its fleet to hybrid Escape SUVs. New York city has offered significant price breaks on taxi medallions (which usually cost upwards of $500,000) for cabbies who decide to use a hybrid.
  5. Ford has a considerable presence internationally and Ford Europe is profitable. After lukewarm response to the Ford Escort in India, Ford introduced its new model called the Ford Ikon, which was very well received in India. Ford is likely to continue gaining market share in the luxury car segment in India. Volvo (a unit of Ford) is also expanding into trucks in India.
  6. The Ford Mustang remains a very popular car in its category and Ford had to increase production to over 190,000 units to meet the high demand for the newly redesigned Mustang.

While you wait for Ford to recover from these lows, you can continue collecting the dividend, which is currently 5.1%. If for some reason Ford decides to eliminate the dividend or even reduce it, all bets are off. The chances of this happening are very low as it would lead to an exodus of value and income oriented investors.

P/S 0.08 Cash $17.00 Billion
P/E 7.52 Long Term Debt $141.74 Billion

F 1-yr Chart

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