The Best Automaker for Your Portfolio

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Ford Motor (NYSE: F  ) . Is America's comeback automaker the real thing? Let's get to the numbers.

Foolish facts

Metric

Ford Motor Co.

CAPS stars (out of 5)

***

Total ratings

9,680

Percent bulls

74.8%

Percent bears

25.2%

Bullish pitches

1,612 out of 2,121

Highest rated peers

BYD Company, Volkswagen Preferred Shares, BMW

Data current as of Sept. 30.

Ford's turnaround story is about as impressive as turnaround stories come. The numbers tell a lot of the story. Most telling could be management's 4.5% return on deployed capital over the past 12 months.

If that doesn't seem like much, consider the context. Ford last earned 4% on its capital in 2000. It's taken a decade to get back where to the automaker is now. In the beleaguered car business, that's a record worth bragging about. Even so, some Fools wonder if Ford's turnaround is complete, and if it is, if the days of outsized stock returns are over.

"Given the general economic slowdown and recent fall in consumer sentiment, I think there is room for downside in Ford shares. Valuation is extremely poor, with a P/E ratio of around 7 versus a 5-year average of just 2.4. As Ford is not a growth stock, earnings growth will not be enough to lift the stock. The earnings outlook is looking poor, and estimates are declining. $10.00 is the target based on [a discounted cash flow analysis]," wrote Foolish investor Tradersinfo earlier this week.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth

Not material

Not material

Not material

Revenue growth

19.5%

(18.5%)

(14.9%)

Gross margin

15.8%

10.6%

10.3%

Receivables growth

Not available

21%

(32.5%)

Shares outstanding

3,439.3 million

3,368.3 million

2,396.3 million

Source: Capital IQ, a division of Standard & Poor's.

Aside from a ballooning share count, Ford is driving in the right direction. Let's review:

  • Revenue growth has returned. But that's actually understating it. Very few large car companies achieve double-digit revenue growth in a quarter, let alone over a full year.
  • Margins are also way up, a sign that the deep discounting that marked auto sales at the height of the Great Recession aren't plaguing Ford.
  • Receivables are more difficult to figure, but that's a minor concern. What matters is that cash is still flowing, though at a lower volume than in years past.

Competitor and peer checkup

Competitor

Normalized Net Income Growth (3 yrs.)

BMW

(10.9%)

BYD Company

61.6%

Ford Motor

Not material

Honda Motor (NYSE: HMC  )

(8.6%)

Nissan Motor

(20.7%)

Tesla Motors (Nasdaq: TSLA  )

Not available

Toyota Motor (NYSE: TM  )

(34%)

Source: Capital IQ. Data current as of Sept. 30.

Here's where Ford falls down, and where Rule Breakers pick BYD stands tall. BYD is a Chinese automaker that's experienced outrageous growth over the past several years, enjoying progressively higher ROC along the way. BYD is also a cash machine, producing close to 5 billion renminbi in free cash flow over the past 12 months.

Grade: Unsustainable
Ford produces plenty of cash, as well, but the stock has rallied more than 70% over the past year. I'm inclined to think the comeback is already priced into the shares, and that BYD is the better play for growth grabbers. As such, I've rated BYD to outperform in my CAPS portfolio.

Now it's your turn to weigh in. Do you like Ford at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

BYD Company is a Motley Fool Rule Breakers recommendation. BMW and Ford are Motley Fool Stock Advisor selections. Procter & Gamble is a Motley Fool Income Investor pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.


Read/Post Comments (5) | Recommend This Article (9)

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 September 30, 2010, at 10:23 PM, demarvin wrote:

    My opinion. Ford, GM and Chrysler are yet on life support because they have not eliminated the Cancer within the auto industry by the name of the UAW. It is only a matter of time until the unions begin the extortion which destroyed the pre-bailed out companies.The unions will demand their share of everything to make up for the current changes.Now that they are subsidized by the US taxpayers,the sky is the limit.

  • Report this Comment On October 01, 2010, at 5:18 AM, kinnedie wrote:

    I was a member of Ford management for over 17 years and at least at Ford, the UAW was not the nightmare that one might expect. This is not to say that profits wouldn't be awesome if workers were paid ten cents a day! My final 17 years were spent at a non-union aircraft manufacturer and the costs to keep the union out were staggering. The labor in an automobile is about 8%, perhaps less now. As long as there is a constant effort to get along with the people that make the product, as in Ford's case, the UAW is a much over blown issue. Today, the subject of pensions always jumps up when unions are mentioned. Prior to the latest downturn, pension funds were invested in the market, seems that someone made off with these funds; the real cause of the pension issue. I have yet to hear the UAW being accused of running off with the pension funds!

  • Report this Comment On October 01, 2010, at 10:54 AM, SMOKEN42 wrote:

    FORD IS ON A ROLL...............THERE PRODUCT LINE IS FANTASTIC, AND GETTING BETTER. THERE LEADERSHIP IS SPOT-ON AND THERE FOOTPRINT IS WORLD-WIDE. MAKING MONEY IN THIS WORLD ECONOMY TRANSLATES INTO HUGE PROFITS DOWN THE ROAD !!!!! WHATS NOT TO LIKE !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

  • Report this Comment On October 01, 2010, at 1:24 PM, baldheadeddork wrote:

    This article is a terrific example of the difference between understanding a stock and understanding a company.

    Wait, I can't say that. The user quoted in this piece doesn't even understand the stock.

    It's not a growth stock? YTD it's up 22% when the S&P and DJIA have been flat. My investment is up 125% since I bought last May. If that isn't growth, what is?

    On what basis does he claim that a P/E of 7 is "extremely poor"? The P/E for Honda, Toyota, and Daimler is 10, 19 and 30, respectively - and Ford is making more money than any of them.

    Earnings outlook is poor? Someone better tell Ford management. They've accelerated their debt reduction forecasts twice already this year, and Mulally has dropped hints the schedule will be moved forward again when the third quarter numbers come out. They don't think there is going to be an earnings problem for the next couple of years.

    To Tim point about Ford's comeback already being priced in to its shares: If that's true, then the rest of the industry is hugely overpriced. Despite it's horrible troubles, Toyota has a market cap 2.5x Ford's. Honda and Daimler, who sells fewer cars than Ford worldwide and makes less money, are each worth 50% more than Ford.

    And this entire piece shows raw ignorance about the state of the car market. Ford is doing better than most in Europe, is growing at a very strong pace in the India, China and Brazil emerging markets, and is growing marketshare in the US while reducing their incentive levels. They're also raising their average transaction prices because customers are buying more heavily-optioned cars.

    About the market as a whole, the top predictor of future new car sales is used car prices, and they've been running at record levels for almost all of 2010. That's happened even as almost every manufacturer in the US is posting double-digit gains over 2009. Everyone who pays attention to this business sees continued growth in new car sales through 2011. Ford is going to have more new product, which means they're going to be able to dial back further on incentives and continue to grow their marketshare.

    About BYD....yeesh. They've pulled back their sales targets and then failed to hit the reduced number. Their growth last year was tied to Chinese government incentives that have ended, and their growth went with it. They're projected to grow from 5.1% to 6.4% of the Chinese market by 2015, which would be smaller in China than Nissan is in the US. And all of the Chinese domestic brands are under a cloud of uncertainty because of the government's announcement that it wants to shrink the number of native car makers from 14 to 10 in the next two years, and create 2-3 "giants". BYD is certainly going to be affected, but no one has even a SWAG on how this is going to impact shareholder value. You can make a more rational case for picking red to outperform black.

  • Report this Comment On October 13, 2010, at 4:49 PM, baldheadeddork wrote:

    Admittedly, it is the mark of a petty man to gloat. But damn, that didn't take long.

    China confiscates seven BYD factories for zoning violations: http://www.bloomberg.com/news/2010-10-13/byd-factories-confi...

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