Looking For Value in the Automobile Industry

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On January 22, Ford (NYSE: F) will report their fiscal fourth quarter earnings. These earnings will mean a lot to how Ford enters 2013 and what the future of the company will become. Let’s explore Ford and see if they are worth our investment dollar.

What’s With That P/E?

Let’s begin this Ford talk by getting the elephant out of the room. Ford’s PE is not in the 2.8 range, that number came about because of a tax credit of $14.1-billion. We can reasonably expect that Ford won’t be receiving $14-billion from the federal government every year, so let’s just use the forward P/E of 8.8 for the remainder of the article.

Now, The Gears!

Ford is a worldwide automotive giant; their brands include Ford and Lincoln. Ford continues to expand upon their designs, features, and specifications in markets around the world in order to compete with General Motors (NYSE: GM), the world’s luxury brands and the Japanese automakers.

At the helm of this American icon is Allan Mulally, former Vice President of Boeing. Mulally has been at Ford since 2006 and has done a lot to keep this company going on its path. Under Mulally’s plan, Ford plan on expanding their development while also making the improvements required to increase profitability.

Financial Stats

Revenue growth at Ford is key. I believe in the ability of Mulally as CEO to make sure that as much revenue as possible is converted into profit for the shareholders. 2010 revenues at Ford were $128.95B and they increased to $136.26B in 2011. This year, revenues are currently at $97.83B and it is safe to assume that revenues will come in no less than $30B for the quarter giving us, at the very worst end of things, $128B in 2012 revenues.

Those wary of debt may wish to turn the other cheek when it comes to Ford. The company has a long-term debt to equity ratio of 3.82. If total debt is counted then the debt to equity ratio at Ford becomes an incredible 4.59. Ford may also take on some debt in the near future in order to pay-off the U.S. government for a 2009 loan (the loan is not due till 2022). If more debt is taken on then investors not too fond of government investment may be willing to jump back in. 

Ford vs. GM

Ford and GM and the US’s two biggest automobile companies and there isn’t too much between them. GM does about $150B in revenue on their Chevrolet, Buick, Cadillac and GMC brands while Ford will come in just a tad bit shy of that mark at around $130B.

There is no doubting that GM has a much nicer balance sheet than Ford with their significantly less debt. GM, in my opinion, has the advantage when it comes to innovation; they built the Volt before the market wanted electric cars. The Volt may be troublesome to GM in some ways but there is no doubting that they were innovative in nature when creating it.

Let’s not leave Ford out in the dust though now, the company is trying its hardest to meet the 2025 CAFE standards (minimum 54.5MPG for every vehicle) before they even arrive. The company's Fusion manages 47 MPG and they’re releasing newer vehicles each year that continue to surprise on their MPG ratings.

Both Ford and GM have to watch out for another American competitor in Tesla Motors (NASDAQ: TSLA). Tesla makes some great looking, high-end electric vehicles. These vehicles cater to those that typically buy Mercedes and BMWs but if they ever manage to bring vehicle cost down then they'll be impeding on the stomping grounds of Ford, and especially GM with the Volt. 

<table> <tbody> <tr> <td> </td> <td><strong>Ford</strong></td> <td><strong>GM</strong></td> <td><strong></strong>Tesla</td> </tr> <tr> <td> <p><strong>Forward P/E</strong></p> </td> <td>8.82</td> <td>7.14</td> <td>504.7</td> </tr> <tr> <td><strong>PEG Ratio</strong></td> <td>1.29</td> <td>0.71</td> <td>-0.29 </td> </tr> <tr> <td><strong>Price/Sales</strong></td> <td>0.37</td> <td>0.29</td> <td>27.5 </td> </tr> <tr> <td><strong>Price/Book</strong></td> <td>2.58</td> <td>1.40</td> <td>N/A </td> </tr> <tr> <td><strong>Revenue(ttm)</strong></td> <td>$132.4B</td> <td>$150.94B</td> <td>$146.3M </td> </tr> <tr> <td><strong>Yield</strong></td> <td>1.6%</td> <td>N/A</td> <td>N/A </td> </tr> </tbody> </table>

All figures from Yahoo! Finance.

Keys to Winning for Ford

For Ford to win over GM, I think they would need to pay off the government loan, continue their strong showing in China, and work to keep up their strong sales in Europe, even if they economy takes a turn for the worst.

If Ford continues to put out great looking, reliable cars in Europe then they should be able to weather any potential crises that come from the continent. There are obviously some problems there now and it will take a team of great people, which Ford has, to keep the company going in the region even as countries face defaults, massive spending cuts, and huge unemployment rates.

In China, Ford is in a great position. For continued success, they must continue to tread lightly. Google and others have made the mistake of going against government wishes which resulted in the fall of their business in China. As long as Ford doesn't make too many mistakes there, they should be golden. 

Ford will have to continue to be innovative both in the US market and the world's markets in order to post gains in profits and continue their companies’ long history atop of the automobile world. 

To Buy or not to Buy?

Ford is a risky play; I think that they have a good shot of increasing profits and hitting the $20 per share price point in 2014, especially if the economy fights back. I also believe that they have a good chance of lackluster performance as consumers go for BMWs, Audis, and Toyotas over Ford or Lincoln.

The company is priced fairly for a speculative play and if I had a more risky nature in my bones I would surely make an investment in Ford. 

Ash1402 has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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