Ford Remains a Great Investment Opportunity
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last year, I outlined the investment thesis for Ford (NYSE: F), and made the case that its lineup of new vehicles would propel the company and the stock to new heights. As noted in the chart below, Ford has delivered by strongly outperforming both its peer group and the S&P 500:
After almost doubling in value, many investors may wonder whether Ford's stock has become overpriced in recent months on the way to a new 52-week high last week. A quick look at the company's valuation will make it clear that there is still room for the stock to appreciate from the current price near $17 per share.
A quick look at valuation
Ford trades at a very reasonable valuation, both compared to its fellow automakers as well as the broader market.
CAPS rating (out of five stars)
|4 stars||2 stars||3 stars||5 stars|
|Market capitalization (in billions)||$67.3||$50.0||$205.4||$71.0|
|TTM revenue (in billions)||$137.6||$151.4||$280.4||$125.5|
|TTM price to sales ratio||0.5||0.3||0.7||0.6|
|TTM price to earnings ratio||11.6||12.5||16.8||14.8|
|Forward price to earnings ratio||10.2||8.3||11.7||12.9|
Source: Motley Fool CAPS and Yahoo! Finance - 7/13/13
Looking at trailing sales, Ford is trading at a cheaper valuation than all of its peers except General Motors (NYSE: GM); GM has had a well publicized plunge into bankruptcy, so there is certainly added risk (and opportunity) in any investment in the company until it can demonstrate a consistent history of performance. GM's seemingly attractive forward P/E of just 8 and PEG of 0.7 are strong indicators that the analyst community hasn't completely bought into the GM recovery story quite yet.
On the bottom line, Ford is trading at a cheaper valuation than all of its peers. Additionally, the company's strong recovery in recent years has allowed it to institute the highest yielding dividend in this group despite a payout ratio of only 17%.
None of the stocks in the peer group noted above are trading at lofty valuations. Toyota Motor and Honda Motor (NYSE: HMC) are both trading at forward P/E ratios of less than 13. From a dividend perspective, both companies are similar to Ford in their ability to further increase dividend payments; Toyota's payout ratio is just 11%, while Honda's is only 31%. As a whole, this peer group is poised to provide a solid mix of earnings growth and dividends to shareholders over the next several years.
Strong growth opportunities
A year ago, the investment thesis in Ford was based on a long-term view that the company is positioning itself for tremendous growth. Nothing has changed since then. Thanks to a new lineup of vehicles that have been well-received by the market, Ford is poised for further success.
The key to Ford's recent surge has been its strong performance in North America. The most recent auto sales data shows Ford's market share in the United States increasing to 16.7% from 16.1% a year ago. Thus far in 2013, Ford's domestic sales have increased 13%, which outpaces the 8% gain reported by GM and 6% gains by Toyota and Honda. This strength has come from a number of vehicles, including increased sales of 22% for F-series pickups, 23% for Escape, and 18% for Fusion.
Europe has been a well-publicized problem area for Ford in recent years, headlined by an anticipated $2 billion loss in the region in 2013. With years of economic turmoil forcing Ford to reduce capacity, all signs indicate that the problems have reached bottom and that stabilization is underway.
Last week, Ford announced June sales in Europe that increased 6% over the prior year; while 6% may not seem that impressive, the overall market's sales declined 7%. As a result, Ford's market share in the region increased by a full percentage point to 8%.
A return to profitability in this region would obviously have a huge impact on Ford's earnings in the future.
To position itself for a portion of the huge growth opportunity in China, Ford is investing heavily in new production facilities, including the recent $500 million engine production facility in Chongqing. In total, Ford has spent over $5 billion since 2006 to boost production in this region. While some of this capacity expansion is not fully operational, Ford is still reporting strong growth in China, headlined by a 44% increase in sales during the first half of 2013.
A hidden benefit from rising interest rates
Most investors think that rising interest rates are exclusively bad news for companies like Ford. Rate increases result in higher interest payments on variable-rate debt and future fixed-rate debt issuances, and a company that relies on customer financing for the completion of sales is subject to pressure from rising rates.
However, there is a very, very important benefit to Ford resulting from rising rates in the form of reduced pension shortfalls. At the end of 2012, Ford's pension plans were underfunded by a staggering $18.7 billion (an increase of $3.3 billion from the prior year). You may ask how this could possibly be good news. Well, the calculation of projected pension liability is heavily influenced by an interest rate assumption that is highly sensitive to fluctuations in current market rates.
As noted on slide 13 of an insightful Ford management presentation, a 1% increase in interest rates translates into a $2.3 billion reduction in the pension plan's shortfall. As a result, it is quite reasonable to expect a multi-billion dollar reduction in the pension shortfall in 2013, which can translate into cash previously earmarked for pension contributions being used for further investment in growth opportunities, dividend increases, share repurchases, or debt reduction.
The investment thesis remains strong
Ford continues to create innovative vehicles that are well-received by the public. In combination with growth efforts abroad, stabilization in Europe, and further efficiencies stemming from the company's One Ford standardization initiatives, there are strong indications that the company can continue to gain market share.
There is no doubt that competition will remain fierce around the world, but June's 3% decline in domestic Camry sales and 5% decline in Prius sales are solid indicators that Ford is making headway against competitors like Toyota. GM remains the leader in auto sales domestically, but Ford's current trajectory has the company on pace to catch GM in a couple of years. While the recent results have been encouraging, it is important to appreciate the fact that GM, Toyota, Honda and others in the industry are formidable competitors with pipelines full of new vehicle models. This can be clearly seen in the recent success of Honda's Accord, which has reported an increase in domestic sales of 20%.
Ford is an excellent opportunity for a "buy what you know" investment; in fact, my personal investment in Ford came shortly after buying a Ford just over a year ago and being strongly impressed by the lineup of vehicles. I encourage anyone considering an investment in Ford (or any other automaker) to do some first hand research to validate the investment thesis.
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Brian Shaw owns shares of Ford. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. 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!