Why I am Bullish on Ford 2/2

Metrics and Valuation (All data came from Morningstar Inc)

This is the second part of my analysis of Ford Motor Inc (F)

Valuation:

Price/Earnings: PE ratio gives you the amount of money you are spending for $1.00 of a company’s earning. A high PE ratio means that the stock is expansive relative to its earnings and may be overvalued. Growth companies tend to have high PE ratios because investors are expecting large earnings growth in the future, even if the current earnings do not justify such a high price. The PEG ratio takes the growth rate into consideration. Any stock with a PEG ratio <1 is considered to be undervalued.

I tend to look at companies that have a PE ratio of 13.00 or below, but it can change dependent on the industry and company. Ford’s PE is 9.07 compared to the S&P 500 PE of 19.39. I believe that Ford is undervalued at this price.

Price/Book: PB ratio is the Price of the stock/Shareholders Equity. This is another valuation that can help investors find undervalued companies. There are some shortcomings to this metric because Shareholders Equity can be easily manipulated. If a company has a low PB ratio (<2.0 I think) then either the company is undervalued or may have financial problems.

Ford has a PB ratio of 2.5, which I think is still a semi undervalued rating.

Metrics:

Return-On-Equity(Net Income/Shareholder’s Equity): ROE is a metric that tells you how efficiently the company is using shareholder’s money. I usually look for an ROE greater than or equal to 18%.

Ford had an ROE of 33.81& in 2013, which means that Ford returned 0.3381 dollars in profit for every shareholder dollar invested.

Return-On-Invested Capital: ROIC is a measurement that shows the rate of return that the company is making off invested capital, such as common equity, preferred shares, and long term bonds. If the cost of capital is greater than the return on invested capital, the company is losing value and vice-versa. The equation for ROIC is: Net Profit after Taxes/Operating Capital

Operating Capital=Average Stockholder Equity + Average Debt Liability

Ford has an ROIC of 6.08% for 2013, while General Motors had an ROIC of 6.42%. Although I usually look for an ROIC between 15%-20%, automobile manufacturers tended to have an average ROIC ratio around 4% for fiscal year 2013.

Dept/Equity: This ratio helps investors determine if the company is actively issuing debt or issuing new shares of stock to raise capital. Ford currently has a debt/equity ratio of 2.9. Though this ratio is high compared to a computer company, auto manufacturers require lots of capital due to the capital-intensive nature of the business. These companies tend to have Debt/Equity ratios above 2.

When conducting financial research, it is important to learn about the financials of other companies within the same sector.

I believe that Ford is undervalued and has very strong growth potential domestically and abroad. China and Africa are two large markets that Ford has just begun to grow in. Ford is also developing innovative solutions to create more fuel-efficient cars. This is very important that a company of this size is still able to make such large changes. Ford is creating value for its shareholders, and I believe that it will continue to.

Disclaimer: I am just a kid with no proper financial training. This report will not guarantee investing success.

Why I am Bullish on Ford

This will be a multiple part analysis of the Ford Motor Company Inc. Ford’s ticker symbol is F.

Income Sheet:

Here is a chart of the company’s Income Sheet. The Income Sheet is one part of the Financial Statement. The income sheet shows the amount of revenue earned by the company for a specific period of time. It also incorporates the costs that the company has incurred to earn its revenue.

 




Morningstar Inc

Revenue growth for Ford(F) over the last three years has averaged 4.4%, compared to General Motors’ (GM) 4.66. The significant decrease in revenue in 2012 was due to the incredibly weak car market in Europe and poor economic conditions in the United States, which resulted in losses for many auto manufacturers. Ford took an active approach to the European crisis. The company closed factories and began to build cars that appealed to the consumer’s taste in the area, a lesson that they used to turn around their North American unit.  

Earnings-per-share rose 23.94% in fiscal year 2013, signaling that Ford has been able to make a come back from a challenging 2012. As well, in the first quarter of 2014, Ford reported its first profit in its European segment in three years.

A worrying concern is Ford’s shrinking margins. In 2014, Ford will launch 23 new models globally, which is one of the most aggressive plans in the history of auto manufacturers. This new line of products has resulted in lower margins, due to costs from research and development, redesigning factories, and special advertisements. But Ford’s dedication to innovating and creating new products that consumers will buy is evident in its lofty goals and actions, such as building F-150s out of aluminum which will save approximately 700 pounds per vehicle.

Area Growth:

In the second Quarter of 2014, Ford’s market share in South Africa increased 1.9% since 2011 to 10.3%. Ford has also had record growth in China. Ford controls 4.6% of the market share, compared to just 2.7% in 2011. As Ford’s market share has grown, the company has surpassed its rival, Toyota Motor Inc, in the number of car sold in China. Though Ford has been successful in many foreign markets, they are expecting larger losses in South America than in previous years.

Ford has exhibited strong growth in these two countries, which have large amounts of growth potential within their car markets. I believe Ford will continue to grow in these foreign markets because of their new product lineup.  

Balance Sheet:

The balance sheet of a company shows the current financial position of a company, such as how much debt does the company have or how many assets does the company hold.

Shareholder’s Equity=Assets-Liabilities

Shareholder’s Equity- The amount of money that would be left if a company sold all of its assets and paid off all of its liabilities. The amount of money a company keeps after paying for its expenses, taxes, and dividends or stock buy-backs is called retained earnings. Retained earnings and the money a company earns from selling stock are two main components of shareholder’s equity.

Assets- Include items that the company holds that are of value: Physical plants or stores, machinery, products, and supplies. Intangible Assets are items that do not have a definite monetary value, such as brand recognition, the company’s relationship between their employees, customer loyalty, and trademarks and patents.  

Liabilities- The amount of money the company owes to other people. This includes expenses such as the payroll to employees or loans that it owes to a bank.

Here is a link to Ford’s Balance Sheet http://www.marketwatch.com/investing/stock/f/financials/balance-sheet

Ford has significantly decreased the amount of debt the company holds in the last five years. This also means that the company will be spending less on debt interest payments.

Marketwatch

Ford’s total amount of liabilities has risen but at a smaller rate than their asset, resulting in Shareholder Equity to increase. Ford has not had a large increase in the amount of shares outstanding, meaning retained earnings have increased.

Disclaimer: I am just a kid with no proper financial training. This report will not guarantee investing success.