Stock Analysis
Ford Motor and Target Corp.
12/7/2012
Ankur Sagar
Ford Motor
Ford Motors is by the one of the most iconic automobile manufacturers in the world.
The company was founded by Henry Ford in 1903; it is a multinational corporation that insures
luxury and affordability all in one package. Ford was the first company to introduce
manufacturing by assembly lines and by 1914, this method of production was known as
“Fordism”.
Ford Motor’s current share price sits at $11.31 which is fairly low then it used to be in its prime.
Ford’s share price one year ago peaked at $18.79. Therefore, Ford Motor’s share price has
suffered a 40% decrease within the last year however, a slow and steady increase during the
past four months.
Ford’s current price-to-earnings ratio is 2.56, which ranks it at the higher end of the fair value
criteria. Two of its closest competitors in the auto manufacturer industry are Toyota (TM) and
General Motors (GM) with P/E ratios currently at 14.13 and 9.38 respectively. Lastly, the auto
manufacturer industry and consumer goods sector have a P/E ratio of 25.30 and 21.50
respectively. Clearly this shows that with the P/E ratio of the company being lower than its
industry and sector, Ford Motor’s is currently undervalued.
The PEG ratio tells another story, Ford Motor’s PEG ratio which is currently 1.47 sits way up on
the ladder against its competitors (TM is at 0.30 and GM is at 0.67) and its industry, which is
0.95. However, with a reasonable PEG ratio and an already higher share price than Ford
Motor’s, TM and GM are looking at a slow but steady growth in the future. On the contrary,
Ford’s share price is already pretty low and so a higher PEG ratio will bring it up side by side to
its competitors, rather than surpass them.
Ford’s price-to-free cash flow ratio is currently at 39.96 which is significantly lower than TM
(240.68), but also higher than GM (-18.75), its industry (-33.70) and sector (-25.85). This tells us
that Ford’s share price is a bit lower than the amount of cash it has on hand. A company uses its
free cash flow to invest in new projects to essentially expand the company, a lower price to
cash free ratio points to a company with a better value.
Ford’s price-to-sales ratio currently sits at 0.33, which is almost half of its industry (0.55) and its
competitors: TM (0.50) and a bit higher than GM (0.26). This ratio indicates that Ford is
undervalued in its industry.
Ford’s return on equity is 140.16 which is extremely higher than its industry (7.90) and its sector
12.80 and also, its competitors: TM (7.96) and GM (13.26). This ratio proves that Ford Motor’s
has excellent management under its belt and has the potential to earn huge profits.
From an investor’s perspective, the dividend yield of a company determines whether or not
they will see money consistently being earned as long as they own a company’s stock. In Ford’s
case, it can be said that its dividend yield is that of fair when compared to its industry and
competitors. Ford sits at 1.80; its industry is 1.86 and competitors: TM (1.60) and GM (N/A).
The potential of an increase in the dividend yield is slim to none because of the fact that it’s
already a slow profit company whose dividend payments are matched to its competitors and
industry.
To see if a company is a safe and stable company is to look at its beta coefficient, which
indicates how volatile a company is with market fluctuations. Ford’s beta is 1.53 which is higher
than TM (0.78) and a bit lower than GM (1.80). This just shows that Ford’s is a safe buy in terms
of a weak economy compared to its competitors.
In conclusion, Ford Motors is a very positive looking company. Its valuation ratios suggest that
it’s generally an undervalued company and that the potential for growth is high compared with
many other automobile manufacturers, which means a higher likelihood of a rising share price
in the future.
Target
With over 1700 stores worldwide, Target is the second largest discount retailer in the
United States and is currently ranked 33rd on the Fortune 500 list of companies with high gross
revenues. Target was founded in 1902 in Minneapolis as the Dayton Dry Goods Company and in
2000 was renamed Target Corporation.
Target’s current share price currently sits at $62.04, which is $3 less than it has ever reached
during its life on the market. One year ago the share price was 53.32 which demonstrate a 16%
increase in share price over the last year with prices staying steady in the last few months.
Target’s current price-to-earnings ratio is 13.75, which is on the low end of the fair value. Two
of its closest competitors in the discount variety stores industry are Wal-Mart (WMT) and
Costco (COST) which currently sit at a share price of $71.65 and $105.95 respectively. The
industry and services sector have P/E ratios of 12.80 and 20.21 respectively. With the P/E ratio
being lower than its sector and competitors and a bit higher than its industry, it is safe to say
that Target is a fairly undervalued company.
The PEG ratio follows through with that notion. Target’s PEG ratio is 1.19, which is a bit lower
than its competitors; WMT (1.58), COST (1.85) and its industry (1.26). This implies that while
the share price of WMT and COST are significantly high, their PEG ratio indicates a potential
growth in the near future. Target on the other hand is projected to grow at a slower rate which
proves that it is only fairly undervalued and not completely.
Target’s price-to-free cash flow ratio (-391.68) confirms this assumption of a legitimately
undervalued company. Its PFCF ratio is lower than that of its competitors: WMT (-232.1) and
COST (240.13). This makes perfect sense because Target, which already has 1763 location, is
currently in the process of wrapping up its expansion process in Canada where it has added
100-150 locations. With less cash on hand at the moment, the PFCF ratio is low because of this
expansion of new projects. WMT on the other hand also has a low PCFC ratio because of the
number of location it was worldwide (8970) and growing. COST does not have many locations
compared to the other two at only 573, thus giving it a higher PCFC ratio than TGT and WMT.
Target’s price-to-sales ratio follows the same assumption as the other valuation ratios. Target’s
P/S ratio (0.56) is significantly lower than its industry (0.87) but a bit higher than its
competitors: WMT (0.52) and COST (0.46). This ratio suggests that Targets stock is a bit
undervalued.
Target’s return on equity goes back and forth with regards to its industry, sector, and
competitors. With a ROE of 19.10, Target is in line with its competitors: WMT (22.96) and COST
(14.09), its industry (22.20) and sector (15.68). ROE of Target in terms of its size has done a
fairly good job in making money when compared to its competitors and sector.
Moving forward to an investor’s most important statistic; the size of Target’s dividend yield.
With a dividend yield of 2.30 which is higher than WMT (2.20) and COST (1.10) and industry
(2.03) and sector (1.79). Potential for the dividend to increase in the future is positive because
of the fact that it has expanded into more countries as stated above, which will lead to more
profits and more payments to investors.
In a weak global economy, with a Beta coefficient of 0.49, which is higher than WMT (0.38) and
COST (0.46) Target is safer than its competitors. In a bear market, its competitors share price
will fall less than that of itself.
In conclusion, considering the entire valuation ratios that have been discussed, it is safe to say
that Target is fairly undervalued company and its future is looking very positive in terms of
growth. The likelihood of the share price increasing it high because of its size compared to COST
for example which has a much higher share price and less locations. Target’s share price will
slowly but surely increase in the future.