Ford - Where's it headed?

By Austin Higgins - March 6, 2013 | Tickers: F, GM, HMC, TM | 0 Comments

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Ford Motor Co. (NYSE: F) is off to a slow start this year from a lot of solid gains over the last year. For the last 12 months, the price is up a little over 3%. Where are the headed through the end of 2013? What is the price target for their stock?

Financial overview

Ford has had a long history of operations and had many successes and flops along the way. There are a few highlights of 2012 and things to come:

• Truck and SUV sales have been increasing
• The Ford Ranger is being discontinued
• New hybrid vehicles are being launched overseas
• The F-150 series is being launched as a natural gas vehicle
• Expansion overseas especially in Asian and African markets

There are some concerns with their operations going in to 2013, though. The European division is expected to lose approximately $2 billion in 2013. In the South American market, there is an expectation of increased costs due to competition in the region.

Pension fund expenses are going to be a major liability moving forward. Ford announced their global pension fund was underfunded by $18.7 billion. In 2013, it expects to make an additional cash payment of $5 billion to the fund to close the gap. The positive side is that Ford has increased the pension fund payments from $3.4 billion in 2012 and $1.1 billion in 2011. The negative side is that the pension fund obligation is still growing. As more workers retire and select lump sump payments over monthly payments, earnings will take a hit. When you compare the $5 billion additional pension fund payment this year to the anticipated earnings of $5.5 billion it looks like a major issue. 

Competition

When forecasting Ford’s future performance, it is important to look at the growth of major competitors: General Motors (NYSE: GM), Toyota Motor (NYSE: TM) and Honda Motor (NYSE: HMC).

When compared to Ford, the revenue growth is higher but Ford has a more profitable net profit margin.

• Revenue Growth Rate: 2.1%
• Average Net Margin: 8%

The net margin includes a major tax benefit from 2011 that resulted in above average net earnings.

General Motors has had quite a few issues over the last few years. In 2012 they had an overproduction in vehicles. But there are some interesting numbers behind their earnings. During the bankruptcy, Class A and Class B shares were created with a special dividend of 9% and 4.45%, respectively. Series A isn’t convertible until 2014. So the specific earnings distributed to these shares will be included in the earnings for common shareholders. Had this happened in 2012, the earnings per share would have been 18% higher. GM recently announced a quarterly payment of $0.59375 per preferred share. This is a total of $51.6 million in preferred dividends. This is a hidden potential of GM in the coming years. Series B shares will convert to $50 worth of common share at the end of 2013, a rate of roughly 1.2 - 1.5 times the preferred share. 

Investors are fully aware of this conversion and the market has likely priced this in to the stock. Once this conversion takes place, there will be more earnings to distribute to each common share. The additional earnings distribution can cause an increase in future stock prices. 

Toyota is the standard for quality and efficiency for automakers in the US. Even with the recall in 2010, their sales have still been solid. In February they announced their sales were up 4.3% from the year before and daily sales were up 8%. These are modest gains, but gains nonetheless. Like the rest of the auto industry, SUVs lead the sales numbers. The Prius decreased in sales from last year as well as the Camry.

Honda had a drastic increase in Honda Accord sales at roughly 35% but the Fit and Civic were declining. In 2012 they saw a 24% increase in vehicle sales. They are planning to launch smaller SUVs in the US and abroad. The United States makes up 40% of their sales. Sales were down in China which is their second largest market. 2012 saw a 3% decline in sales for the area.

Forecast

This is a possible forecast for the next three years. Ford management expects 2013 earnings to be relatively similar to 2012. This forecast I performed confirms the management’s expectations. (All numbers in thousands.)

I used a 5% growth rate based on an adjusted average of Ford and competitors. I looked at the average growth rate of Ford and it's competitors over the last three years. I adjusted the average down to 5%  as some of their international operations are seeing declines while US sales are increasing. The growth rate could be slightly lower if international sales decline more than expected. 

Ford's tax rate has fluctuated in the last few years with some years paying no income tax. In 2012 it paid 26%. I used 25% to factor in any tax benefits they may receive this year. 

Ford's interest expense has declined by roughly 33% each year for the last three years. Its net long term liabilities decreased by 43% from 2010 to 2011. In 2012, it increased 12%. I used a reduction of 33% to calculate the anticipated interest expense. 

The gross margin has been steadily in the area of 17%. I used a straight 4-year average gross margin of 17.3% in my future projections. The gross margin is not likely to fluctuate for a company with this long of an operating history. 

Valuation 

Using an average discount rate of 12%, the earnings result in a per share price of $22.79. A three-year horizon with a terminal value was used.

Taking the earnings and looking at the price to earnings valuation method yields a different price. The average price to earnings for Ford’s competition is 13.81. Ford’s current price to earnings is 9.1 and the highest is Toyota. Using an adjusted average, the price is $22.19 per share.

While both of these valuation methods have reasonable justification, the price is still too high for Ford going in to the second quarter of 2013. A more realistic price target is on the low end of the price to earnings valuation: $15.23 per share.

There are still some risks. If international operations yield more losses than previously expected, the price would need to be adjusted lower. Also, watch for pension liabilities throughout the year.

Ford has definite room to grow this year.

Austin Higgins is the Principal Consultant for Avant Venture Group. and focuses on building businesses through innovation, growth and investment. Learn more at AvantVentureGroup.com and follow him on Twitter @Austin_Higgins. 

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