Ford will be Shifting out of Reverse
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For long term shareholders of Ford Motor Co. (NYSE: F), there is a "bad moon on the rise" that surely brings back unpleasant memories of The Great Recession, when the stock price fell into the low single digits. But this is not the Ford Motor Co. that had to leverage everything, even the blue oval emblem, for $24 billion in loans in order to recover. There is one main distinction and it makes all the difference in the world: Ford Motor Co. now builds good cars and trucks that are also good looking.
In a recent rating of motor vehicles for reliability, the Ford Fusion and Ford Explorer finished high. In manufacturer reliability ratings, Ford ranks above Volkswagen, BMW and Mercedes. This is important for investors the way it is for airlines to finish high. People buy motor vehicles that look good and run good, just like they fly on airlines that have good customer service. Yes, it is as simple as that. As a result of that, earnings-per-share growth for Ford Motors for the last five years has been a very solid 23.58%.
American car-makers lost their grip on the marketplace in the 1970s and the 1980s. As gas rose, a premium was placed on economy cars. American cars in that group were pathetic vehicles, ugly and unreliable. Ford had the Pinto. The Chevrolet Division of General Motors (NYSE: GM) had the Vega. And AMC, now part of Fiat had the Gremlin. It did not get much worse than that--maybe the Yugo!
From overseas came the Celica and Corolla from Toyota (NYSE: TM); the accord from Honda (NYSE: HMC); the Datsun Z-Car series from Nissan; the BMW 2002 and 320i from BMW; and, of course, the venerable Beetle from Volkswagen, now the world's largest seller of motor vehicles.
Ford just reported its number for the second quarter of 2012 and posted an overall profit of $1 billion, despite losing $400 million in Europe. That profit was down from $2.4 billion from the same period in 2011, however.
Now deep in recession, the European market is dragging down other automakers in addition to Ford. The European division of General Motors has lost $14 billion over the last twelve years. Fiat, which rescued Chrysler in 2009, is tottering as the launch of the Fiat 500 subcompact has not gone well. Volkswagen had to cut prices to maintain its market share in Europe. The Volkswagen Golf has been reduced by 25 percent as overall car sales in Europe fell by 1.7 percent, leading to forecasts that 2012 will be a 17-year low for the industry
The "One Ford" plan that has Ford vehicle platforms and manufacturing uniform around the world is making the response of the company to the changing global marketplace more nimble. This is also utilized by Volkswagen. Ford now operates with less than half the account receivable levels and half the inventory levels of GM. In addition, the receivables for the automotive segment are also superior to those of GM by about 2-1, 31.2 to 15.97.
For Ford, North America, Asia and South America are holding up well. This performance in Asia and South America is critical as, overall, foreign sales account for about 41 percent of revenues. The competition from abroad and in overseas markets is stiff, particularly from Toyota, Volkswagen, and South Korea's Hyundai and Kia Motors.
Ford is now trading at very attractive valuations. The price-to-sales ratio is 0.25. By contrast, the price-to-sales ratio for Toyota is 0.54. For Honda, it is 0.56.
The price-to-earnings growth (PEG) ratio is even more appealing for Ford at 0.25. According to investing legend Peter Lynch, this is one of the most important indications. A PEG of 1 is adequate: The lower the better. Toyota Motor has a PEG of 0.94. Honda Motor Co. has one of 0.61. For GM, the PEG is 0.42.
Ford Motor has done an admirable job of cleaning up its balance sheet. The debt load, still high, has been greatly lowered. A dividend of 2.23% is now being paid to shareholders. There is plenty of cash to allow for dividend growth or a share repurchase program to lift the stock price.
This is needed as, year to date, Ford is down by more than 16%. But earnings-per-share growth is up by 197% for the year. Next year, earnings-per-share growth is projected to increase by another 18.94%. From that boost, Ford Motors should be shifting back into gear. Now trading slightly over $9 a share, the mean analyst target price over the next year is $13.48.
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. 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.If you have questions about this post or the Fool’s blog network, click here for information.