When a $34.5 Million Payday Is Warranted
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For haters of anyone with the nerve to publicly question Apple, Apple products or heaven forbid Apply management, this write-up may come as a surprise. In case you missed the prior article, my belief was and is that the $400 million in total compensation Apple CEO Tim Cook received in stock options wasn’t warranted. Yes, he can’t cash them all for 10 years (1/2 in 5 years) but that’s just insane. As you might imagine I was roundly criticized by lovers of all things Apple. I got over it.
So with that history as a backdrop it may seem strange to suggest the stock options awarded to Ford (NYSE: F) CEO Alan Mulally a couple years ago – and are now valued at over $34 million – was and are entirely warranted. I mean, Ford's no Apple - and they're not. But there are some big differences between the two scenarios.
The first and most important distinction was that when Ford awarded the options in 2009 they were worth about $5.5 million, after taxes. The stock was trading below $2 a share and let’s face it, the company was in trouble. Not unlike most every other automobile manufacturer in the U.S.
A look at 2009 year-end numbers isn't real pretty for Ford shareholders. Revenue for 2009 totaled about $116 billion and generated $2.7 billion in net income. Now, that’s not bad considering this was the same year GM and Chrysler both filed for bankruptcy and the Ford management team were in labor talks. Now let's take a look at fiscal year 2011. Revenue jumped to over $136 billion and net income was an almost shocking $20 billion – now that’s more like it. Much of that net income - $12.4 billion in fact – was a favorable one-time special item. But even removing that from the mix, Ford nearly tripled profit from 2009 to 2011.
The company also reduced debt, generated $5.6 billion in positive operating cash flow and improved the amount of cash vs. debt by nearly $10 billion over the prior year. Yowsah. And here’s what’s great about Ford management. What do they do now that they’re rolling in dough? Give it back to shareholders in the form of a 1.63% dividend.
For whatever reason investors still have not got on the Ford bandwagon as they should. Yes, the stock price is up nearly 20% since my first article in December, but it remains ridiculously inexpensive compared to others in the industry. Ford currently trades at about 2.5 times earnings. Now, that’s a bit skewed because of the one-time special item that boosted earnings, but looking forward Ford is still priced at less than 8 times earnings.
Toyota (NYSE: TM) is off the charts expensive trading at a multiple of 54+ times earnings – supposedly based on projected sales increases. Yeah that’s only about 14 times estimated future earnings, but even that’s twice as expensive as Ford. General Motors (NYSE: GM) is another solid option for value investors. Coming off a great year themselves, GM’s P/E of 5.48 is also attractive and like Ford are on a 3-year roll of revenue growth and 2011’s net income was an impressive 50% improvement over 2010.
Now toss in what is shaping up to be a perfect storm – in a good way – for automakers in 2012 and Ford looks even better. A CEO that drives that kind of growth and is rewarded by his results? Yeah, that’s a well deserved $34.5 million.
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