Sector:
Consumer Discretionary
Recommendation: Don’t buy
Industry:
Automotive
Valuation:
November 21, 2014
NYSE: F
Ford Motors
Stock Price
52-Week Range
Average Volume
Market Capitalization
P/E Ratio
Dividends per Share
S&P Credit Rating LT
Valuation Model
Dividend Growth
Holding Period Return
Market Multiples
Enterprise Value
Residual Income
Free Cash Flow
Company Profile
Ford Motor Company was founded in 1903 and
is based in Dearborn, Michigan. Currently, Ford
has 181,000 employees worldwide. It is the
second largest U.S. motor vehicle manufacturer.
It develops, manufactures, distributes, and
services vehicles, parts, and accessories
worldwide. The company operates through two
sectors, Automotive and Financial Services.
Within the financial services sector Ford
provides financing products, which include retail
installment sale contracts for new and used
vehicles; leases for new vehicles to retail
customers, government entities, daily rental car
companies, and fleet customers; wholesale
financing that comprise loans to dealers to
finance the purchase of vehicle inventory, and
other financing products, as well as providing
insurance services.
Sector Outlook
The S&P IQ currently recommends market
weighting the S&P 500 Consumer Discretionary
sector. Currently the Consumer Discretionary
sector represents 11.7% of the S&P 500 index
and as seen a year-to-date loss of about 1.5% in
price compared to the 5.3% gain for the S&P
500. Ford is located within the automobile
manufacturers’ sub-industry which currently has
a positive outlook over the next 12 months.
Despite a record number of vehicle recalls, U.S.
automotive demand is trending higher on a yearover-year basis. Prices year-to-date for
automobile manufacturers are currently down
$11.52
$15.43
$13.26 - $18.12
39,393,300
59.5B
10.11
$0.50
BBBCalculated Value
$16.20
$13.94
$8.95
$2.44
$16.08
($30.28)
10.8%, while Ford has seen of 52 week percent
trend downward by roughly 9.65%. Ford has
seen slightly higher volume sales in Europe this
year and expects global demand to continue to
rise into 2015. The highly profitable light truck
segment is also expected to see an increase in
demand.
SWOT Analysis
Strengths: Ford has enjoyed a reputational
renaissance as domestic investors applauded the
way that it navigated the financial crisis by
rejecting federal stimulus and changing its
image towards a more progressive brand. Ford’s
cutting-edge technology is also a strong point,
with its green Eco-Boost engine being named
one of Ward’s “10 best” in 2013 and the SYNC
digital system is among the industry’s highestrated connectivity systems. Furthermore, Ford
recently unified its offerings by employing a
global marketing strategy in which it offers the
same lineup to all of its markets. This allows the
company to realize higher margins and cement
better brand recognition. In China, Ford’s
market share has grown from 3.2% in 2012 to
4.1% in 2013. This highlights the pace at which
expansion into the Asia-Pacific region can buoy
the automaker.
Weaknesses: The appreciating US dollar has
had an adverse impact on the multitude of US
companies that derive a significant portion of
their sales outside of the United States. In the
company’s statement of comprehensive income,
Ratio Analysis
Current Ratio
Inv. Turnover
Net Profit Margin
Debt-to-Assets
Return on Equity
Asset Turnover
Interest Coverage
Dupont Analysis
NI/S
S/A
1/(1-D/A)
ROE
Ford
GM
6.74
19.06
4.87%
0.87
27.12%
0.73
9.45
4.87%
0.73
7.56
27.12%
adjustments for foreign currency fluctuations
were measured at a loss of 3.5% of net income.
Ford has also experienced a decline in European
unit sales from 18 million in 2007 to 13.8
million in 2013, the US has largely recovered
losses experienced directly following the crisis.
Opportunities: Since 2008, the automotive
industry has experienced a change in consumer
tastes away from gas-guzzling trucks and SUVs
towards more fuel-efficient machines. Vehiclebuyers are favoring the Ford’s recent truck
models, including the 2015 Ford F-150, which
offers the best fuel efficiency of any full-size
truck. By utilizing aluminum to make its cars
lighter, the company has been able to hasten its
compliance with Obama’s 2025 EPA standards.
Threats: Given the recent underperformance of
oil due to expanding domestic supply and
OPEC’s stern production outlooks, lower
gasoline prices could be an underlying trend
over the next several years. The domestic shale
boom has supplemented global supply and could
threaten Ford’s eco-initiative that is most
effective under when prices are high at the
pump. Foreign currency fluctuations can hurt the
company moving forward.
Ratio Analysis
Some of Ford’s ratios seem to be in line with
most of their nearest competitors, with their Net
Profit Margin and Total Asset Turnover falling
within the general range of their competitors.
However, their ROE, Current, Interest Coverage,
Debt-to-Asset, and Inventory Turnover Ratios
are much larger than their competitors. These
discrepancies can be explained by Ford’s highly
leveraged business model. The majority of their
Toyota
1.69
11.07
3.44%
0.74
12.55%
0.93
23.33
7.10
13.56
7.10%
0.63
11.98%
0.62
116.77
Kia
2.59
10.99
8.02%
0.44
18.85%
1.32
35.43
leve
rage
is in
lon
gter
m
3.44%
7.10%
8.02% sec
0.93
0.62
1.32 uriti
3.90
2.72
1.79
es
12.55%
11.98%
18.85%
rath
er than short term as evidenced by their current
ratio.
Ford also has a higher ROE and lower Interest
Coverage Margin than the other competitors
since the equity portion of their balance sheet is
so much smaller. Ford’s business model and
goal is to turn over their inventory as quickly
and as many times as possible in order to make
up for the significantly lower gross and net
profit margins experienced by the US
companies. This presents a risky situation since
their Interest coverage ratio is so low in
comparison to their competitors and they are at a
much higher risk of defaulting on that debt.
Pricing Models
We valued Ford’s stock with six different
pricing models: dividend growth, holding period
return, market multiples, enterprise value,
residual income and free cash flow. All
information was extracted from Bloomberg and
confirmed with Standard and Poor’s Capital IQ,
Yahoo! Finance, and Morningstar.
In our analysis we encountered one primary
outliers: The free cash flow model. Because of
Ford’s recent financial troubles, they have a
negative current free cash flow, which resulted
in a negative valuations. In order to eliminate it
as a potential outlier, we have removed the free
cash flow model to arrive at a value of $11.52.
Recommendation
The pricing models suggest that Ford is
overvalued, due to an analysis calculating a
value of $11.52 per share, but trading between
$15 and $16 per share. Therefore, due to the
quantitative and qualitative analysis, we do not
recommend investing in Ford at this time.