Ford: Love It -- or Leave It?

A couple weeks back, in a short article discussing Ford's (NYSE: F  ) most recent earnings release, I wrote a quick summary of some of the possible obstacles facing the company as it continues its recovery.

Hoo-boy. Y'all lit up the comments thread -- and my mailbox -- like nothing I've written since ... well, since the last article I wrote about Ford, back in January. Apparently a lot of you take exception to the idea that Ford might be something other than a screaming buy at current prices.

So I figured I should explain where I'm coming from in more detail.

But first, full disclosure, right here up front: I own Ford stock -- specifically, convertible preferred shares. After pondering it right here in public for several weeks, I took a position in early March at a little over $6 a share (when the common stock was trading at about $1.90), sold half of the position in June (at a bit less than $23), and am planning to hold the other half for the foreseeable future.

So, long story short: I've already made money out of Ford's turnaround, and I'm hoping to make more.

Now, that said, here's the question I want to ponder: Is Ford stock -- common, preferred, whatever -- a buy today?

The case for Ford
As I see it, Ford is -- assuming the economy doesn't take a nosedive from here -- through the worst of it and on the road to some sort of sustainable recovery. What's it got going for it? Plenty:

  • Management. CEO Alan Mulally, recruited from Boeing (NYSE: BA  ) by the Ford family, didn't know much about the car industry when he arrived. That turned out to be a great thing -- unbound by Detroit cultural expectations, but with the support of the Fords, he was free to tear up rulebooks and reform Ford's stodgy, overlayered management culture. It's hard to overstate what a huge change this made -- indeed, after 30-plus years of hype about "transformation," Ford's sprawling global organization is finally, now, working in a cohesive way toward well-defined goals, and that's one heck of a transformation.
  • Product. All of a sudden it seems like Ford products are showing up at the top of all sorts of comparison tests -- not just on "initial quality," but on their merits as, y'know, cars. People are starting to get the picture -- Fords (and Lincolns and Mercurys) look good, perform well, are pleasant to drive, and stay screwed together about as well as the standard-bearers from stalwarts like Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) . And from what I can tell, there are some very promising vehicles in the development pipeline.
  • Perception and market share. It's not just the product that's helping -- Ford has won big points in many minds for not taking part in the industry bailout that reshaped its local competitors. Not only is Ford making a lot of sales to disgruntled former General Motors and Chrysler loyalists, but Ford's market share is growing in Europe, too, adding another dimension to its recovery. And with the recent announcement that Ford plans to increase production in the next two quarters, Ford executives clearly feel comfortable that this growth will continue.
  • Burn rate. Ford actually reported a profit in the second quarter, though it was from debt restructuring and other cost-saving measures, not operations. Still, such moves dramatically reduced the rate at which Ford is burning through the $23.5 billion it mostly raised by mortgaging the company's assets. There should be more than enough to keep the lights on and product development moving until a return to profitability is attained.
  • Future margins. I don't know what Ford's margins are going to look like in 2-3 years, but by cutting costs, reworking their union contracts, downsizing, and holding on to Ford Motor Credit, their captive finance company, it seems well-positioned to be competitive.

The downside
The short summary of the downside is simple: There are a lot of unknowns right now. Where will the competition -- GM and Chrysler with their newly lowered cost structures, the Japanese with their (relatively) stable finances and perennially strong products, the Europeans (soon to include Fiat, makers of some of the world's most popular small cars) -- be in a year or three? Are these market share gains sustainable? The government will presumably backstop any key parts suppliers that go under, but are disruptions still possible?

And even if everything works out, and Ford reaches a happy state of sustainable profitability in 2011, does that make it a buy at current prices? What if the economic recovery lags and Ford has to do a round of (dilutive) equity financing to keep going?

Stockpicking is an uncertain science, but this one is way more uncertain than most.

The upshot
As I see it, there are -- and have been, for several months -- two separate points to consider:

  • Will Ford survive the current economic crisis without an equity-destroying trip through bankruptcy court?
  • If it does, what's it worth?

The answer to the first question seems a bit clearer than it was at the beginning of the year -- certainly the company's chances of survival are looking pretty good. The second question is impossible to answer without some wild guesses -- Ford's book value is negative at the moment, thanks to those mortgages, and although management is predicting a return to profitability by 2011, there's an awful lot of uncertainty left in the economy.

Still, that said, taking the current, possibly optimistic, analyst consensus earnings forecast of $0.96 a share for fiscal year 2011 and assuming a P/E ratio of 12.37, which is Ford's historical average using normalized EPS dating from 2006 back to 1993, we get a quick-and-dirty value at the end of 2011 of $11.87. Applying a 15% discount rate for all the uncertainty puts us just under $9 ... not too much higher from where the stock is trading today.

On the other hand, it's entirely possible that the stock could double or triple from here in the next five years or so, if Ford's management continues to deliver and the economy cooperates. For the patient, that might make it a buy. After all, the chances of a huge loss are looking fairly low -- while Ford is a much riskier bet than a true blue chip like Johnson & Johnson (NYSE: JNJ  ) or Coca-Cola (NYSE: KO  ) , I think that it's not feeling speculative anymore. Do you agree?

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Fool contributor John Rosevear owns Ford Motor Company preferred stock and is currently trying to talk his spouse into replacing her minivan with an EcoBoost-powered Ford Flex. Coca-Cola is a Motley Fool Inside Value recommendation. Johnson & Johnson and Coca-Cola are Motley Fool Income Investor selections. Nissan Motor is a Motley Fool Global Gains recommendation. You can try any of our Foolish newsletters free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (23) | Recommend This Article (47)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 18, 2009, at 3:40 PM, YingandYang wrote:

    Ford will burn thru the $$$ *&* the Debt holders will come after the assets=They are set for a Fall

  • Report this Comment On August 18, 2009, at 3:40 PM, bmagnani wrote:

    I bought Ford stock at $1.83 and then again at $6.20. I believe that Ford will definitely show itself as the true winner coming out of the Recession. I'm sticking with this one.

  • Report this Comment On August 18, 2009, at 4:02 PM, kinnedie wrote:

    Yes, I agree and think that you have it covered as well as possible, without a crystal ball!

    I just bought a Fusion SEL I-4 on the CARS program and there is nothing out there even close to this vehicle. I know that Consumers Reports guys are ex Nissan and foreign car guys, but can't understand how they can rate anything close to this car; their own numbers put the Fusion a mile ahead. Check it out!

    I sold my Camry Hybrid for good money, no way did it measure up. Wish that I had the money for the Fusion Hybrid, 8 mpg more than the Camry, yet CR in their dreams finds them similar?

  • Report this Comment On August 18, 2009, at 5:13 PM, JetCityKnight wrote:

    I think Ford is well positioned with the European and Australian sales hit the Ford Fiesta subcompact, coming to the U.S. in 2010. Ford has always done well in the U.K. Europe and Australia. Mulally was very successful when he led the 777 team at Boeing. Boeing probably wishes he hadn't left. The Focus is a good small car and sales are brisk along with the Fusion Hybrid. The Ford 150 is very successful as well. The Mustang is an American icon.

  • Report this Comment On August 18, 2009, at 5:57 PM, spawn44 wrote:

    If you pull out the slide ruler you will not buy ford shares. I remember back in the early 70's when Chrysler was ready to go down the tubes. Iacocca was picked to perform the miracle of turning the company around, which he did. I bought shares at 3.00 and sold at 15.00 before they went to 50.00.

    There cars were nothing like the line ford has.

  • Report this Comment On August 18, 2009, at 6:06 PM, LenA3983 wrote:

    YingandYang, that is the most incorrect thing I've seen anyone post. Ford's cash burn Ash slowed to a trickle, it's market share is up, and it's product pipeline is full of new product. Ford is going to come out on top of the USA auto industry, transplants included.

    kinnedie, enjoy your Fusion - great car. And wait until the new Taurus starts turning more heads - great full size car, and nothing else like oit on the market at it's price point.

  • Report this Comment On August 18, 2009, at 6:36 PM, JakilaTheHun wrote:

    Great article. I largely agree with your analysis of Ford, which is why I supported a long position under $3. However, I question whether risk-reward is favorable at this point. I certainly agree that Mulally has turned Ford around and that they could turn out to be one of the big success stories of the next decade; just don't feel safe enough with the high risks of owning this stock over $8.

    Fwiw, I came up with a probable valuation of about $10 - $20 back in January; with my best guess being at $14. But downside risk is most definitely $0 with their heavy leverage.

  • Report this Comment On August 18, 2009, at 6:55 PM, plange01 wrote:

    love the company and its shortly to be the only US automaker as GM and chrysler will fail.even so i sold my stock at $8.00.its up from a low of $1.00 and i like profits better! i will buy it back when it drops this winter..

  • Report this Comment On August 18, 2009, at 7:41 PM, Gardnermiles wrote:

    I just think Americans need to buy more of the American made products. I am tired of looking at labels "Made in China" and knowing I am supporting slavery. I've always been ready to pay just that little bit more to keep an American employed and aid the American economy. When I find an American made product the store doesn't need a sales clerk as it is an instant buy from me. Keep our Money In America.

    China has enough of it's own.

  • Report this Comment On August 18, 2009, at 9:23 PM, Topotraveler wrote:

    Ford is poised to make an upward stock move probably around $12 share, before taking a little tumble by Dec. Xmas sales will be off this season in the car market. If Ford comes up with some creative financing plans for their top sellers, this could boost xmas sales and give them a slight bump in the market. I would hold half shares and sell rest by Oct.

    Watch for new ford add campaigns and again their sponsorship of American Idol will reveal some great cars on the horizon!

  • Report this Comment On August 19, 2009, at 1:50 AM, PoundMutt wrote:

    Wife bought a 2007 Chevy Equinox and upon reading the 'Where Made" blurb found out it was made 50% in CHINA!!!

  • Report this Comment On August 19, 2009, at 11:35 AM, iPhoned wrote:

    The problem is people don't buy stocks to OWN Companies anymore. Whatever happened to investing in America? Ford should be bought by Americans, just for the fact they didn't have their noses in the public tax trough like that big bloated one, and the private owned one did! I have to laugh at all of the so-called experts (often gen-x/next noobs) who call day trading stupid, but still talk about buying and selling stocks like they were trading cards. I guess being a "Day Trader" is bad, but being a Month or Year trader is ok. One of the richest people I've ever met was a blue collar worker who said he saved every penny he could, then bought and NEVER sold.

  • Report this Comment On August 19, 2009, at 12:58 PM, Big50Shooter wrote:

    Nice article... I think you did as good a job as could be done to try and put a value figure on Ford...

    Being in the Detroit area, and having many friends that are currently at Ford and retired recently from there, from what I hear them say, I have to agree with just about everythng you said.

    One thing you mentioned, and I think will hold a BIG weight in determining the good-will/perceived value of Ford, is them being the only US car company that DIDN'T take the bailout and they are making it all on their own! I think the sentiment of "We the People" is easy to see (look at the angry folks at the politician's town hall meetings), and this sentiment will play right into the Ford court for the next year or two! I know people that were die-hard Chevy types that have switched to Ford products simply because of this factor, and I thnk that sentiment will continue to grow, as long as the economy doesn't worsen a ton (which it still could!)...

    FWIW, I am a long time holder of Ford common stock, and I used the lows to do some wonderful cost averaging in the recent past... I could sell Ford right now and make some money, but I won't because Ford IS America, and it WILL BE part of America for quite a while from what I see... Plus, I agree; I think we'll see Ford dabble in the $10-$12/share range in the next 6-12 months...

  • Report this Comment On August 20, 2009, at 2:29 AM, ty007 wrote:

    Nice article, I thought the last one was a little lacking in substance to back up your claims but after this one I will give you thumbs up.

    Whether or not you like Ford or you hate them, the points brought up in this article I feel are very valid in consideration during any speculative investment.

    Sure we all want to think about gumdrops and rainbows....and how much money we could make off something but the important thing to consider is What Can and possibly will go wrong.

    Like Benjamin Graham said "in the short term stock prices are like a democracy, however in the long term they are based off of their real fundamentals and valuations."

    Things seem a bit frothy right now but I think it is highly possible Ford will continue on their path to success.

  • Report this Comment On August 20, 2009, at 4:46 AM, saunafool wrote:

    I'm in Europe and the Ford designs over here are really excellent. They basically have cars in the small, mid, and full size categories which are all successful (granted, these would be European size classifications which are a bit smaller than American definitions).

    Fiesta (small)--brand new design 2009

    Focus (mid)--current design successful, new design arriving next year

    Mondeo (full)--new design 2008, great looking car, much better looking than the Taurus

    They have mini-vans built on the Focus (C-Max) and Mondeo (S-Max) platforms which are very popular. Plus, they have a great looking small SUV, the Kuga, which is doing well.

    In short, their product line-up outside the U.S. is very strong.

  • Report this Comment On August 21, 2009, at 8:37 AM, Trumpetor wrote:

    Mullaly will need to get rid of the old white collar workers. They were hired in the 70's when nepotism ran wild at FORD. Back in those day's it wasn't performance that mattered, it was who you knew or more correctly, who your dad knew. Ford needs to get rid of the old boy's that stand around the water coolers with nothing to do. When Mulally took over at Boeing the company was known as "The Lazy B". He succesfully purged the company of this fatty layer.

    He must do the same at FORD. I know guy's that work there that collect huge salaries 150k+ and are given two lease cars a year. They add no value to the company, and some spend there day's sending porn around the internet all day. I say out with the old, and in with the new. Mr Mullaly should be the right man for the job, but he needs to pour the draino in the drain and burn the FAT not the cash!

  • Report this Comment On August 21, 2009, at 12:56 PM, allmusl70 wrote:

    Nice article!!! Your points are well thought out and presented. I bought Ford securities (common and preferred) back in the spring. They appreciated so much in value, I have recently sold some. I now have a strong position in Ford, but have pulled out my initial investment along with a little profit.

    Ford is a risk and I don't think anyone can reasonably argue that. But, I believe it is a calculated risk and one that has much promise. If Mulally leaves, my money will leave with him!

  • Report this Comment On August 21, 2009, at 7:13 PM, mitchjl wrote:

    I average $4.00 cost and i intend to be a long term investor.I did it twice in the past with Ford stock.This is IMO the best opportunity to triple your investment as the economy is moving positive.The next step is lower unemployment which as experts agree is the last to recover from a recession.When this happens Ford stock will advance at a steady rate.Until then i don't see to much of an upward movement.Don't be discouraged,but be patient.I know this is good advice.Trust Mulally ,he knows what it takes to make a company a sucess.His past guidence is remarkable.

  • Report this Comment On August 24, 2009, at 10:57 AM, deerco wrote:

    At what point do you feel Ford's bond rating be upgraded? It is currently at CCC- (junk). I feel that might be the catalyst that pushes this stock past $9.

  • Report this Comment On August 24, 2009, at 12:22 PM, zetabug wrote:

    This article is right on. Once fleet sales kick in, Ford sales will go up. They have great high quality products (don't bother with biased Consumer Reports who don't know how to test anything) and are making a fantastic come back with Malally in charge. The new Taurus is awesome and the Fusion is also great compared to the Camry or Accord. Don't understand the attaction to the Camry, a good car, but not a great car. Without the economy changing much, I predict $12 to $14. If the economy recovers robustly, you will see this stock north of $20. Ford is way ahead of creating a brand for itself (which the Toyota, Honda, BMW and Mercedes have known how to do for a long time) over GM and Chrysler, which is something Malally understands. Ford will rule.

  • Report this Comment On August 24, 2009, at 12:49 PM, kabierwatz wrote:

    Is it possible that your reasons to buy Ford are already priced in? $8 is a hefty price to pay (I think) for a company that, despite everything it has going for it, is still at major risk of remaining unprofitable for the near future and yielding its potential market share gains to foreign competitors (Hyundai comes to mind). Not to mention the negative book value that you mentioned. Your valuation explanation at the end hinges upon some very debatable expectations. Overall, I like Ford just not above $7 right now.

  • Report this Comment On August 24, 2009, at 2:07 PM, TMFMarlowe wrote:

    kabierwatz, my valuation does indeed hinge on some very debatable expectations, and I tried to be clear about that. That's the whole problem (or for some, the opportunity) with this thing right now, and your point of view is IMO entirely defensible.

    My goal with this article was to drill down to what those expectations really are and to try to put some numbers on them. If anyone's got an alternative analysis, or alternative numbers, that they feel strongly about, I'd very much like to see it. I'm sure I'll be revisiting this with another article before too long.

    Thanks for reading.

    John Rosevear

  • Report this Comment On November 18, 2009, at 7:41 PM, kiee1 wrote:

    Posted: 10:47 AM EST June 05, 2009kiee1

    86 CommentsI do belive the Gentalman writing these story must be a New Yorker. AS I belive all drug companies in the next 12 months to fall dramadicaly as a Washington insider I will state medicare medicade will buy drugs as the VA does in bulk. As most insurence companys are already doing. the last to pay full price medicare will change . I predict A 50% drop in drug companies. I Say frist buy GE as the light bulbs will change to floresent if you look at what the airlined are buying smaller jets in Brazil they cant make Embrairs as fast as the demand ge engines .wind turbines GE generators, if NBC changes with the didgital TV and runs its cable networks over the air usa,bravo,cnbc,msnbc, cable could be a thing of the past as you can see a singlr chanle can run at least 8 signals charter cable already in bankruptcy, many citys concidering making the whole town a hot spot for internet. I alreadt use my PC. as my phone free. high tec stocks . HP, dell, Old IBM. microsoft giving free use of its ...(Read more of this comment)new operating system . It already works great but next year when its time to buy it most PCS will aready be running it and most people wont swith back to vista A great buy now, And Ford I belive still under valued did sell mine with the profit could not chance holding as it went over ^ dooars a share and I bought at its low point I still hold Ford bonds may sell to offset capital gains tax . Thier are companies that are going to increase stock price at least 400% by the end of the year .advice If you trust a broker who is read the story I am commenting onhe will take the advice spend 5 minutes follow it and does no research 60 hours research for every25 thousend you invest . thanks

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