Is Ford the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Ford Motor (NYSE: F  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Ford.

Factor What We Want to See Actual Pass or Fail?
Growth 5-year annual revenue growth > 15% (5.5%) Fail
  1-year revenue growth > 12% 20.7% Pass
Margins Gross margin > 35% 15.7% Fail
  Net margin > 15% 5.4% Fail
Balance sheet Debt to equity < 50% NM NM
  Current ratio > 1.3 1.34 Pass
Opportunities Return on equity > 15% NM NM
Valuation Normalized P/E < 20 15.92 Pass
Dividends Current yield > 2% 0% Fail
  5-year dividend growth > 10% 0% Fail
       
  Total Score   3 out of 8

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Ford has negative shareholder equity. Total score = number of passes.

Ford drives away with a score of three. That doesn't look too good, but the carmaker has made great strides in the past couple of years to get back to profitability.

A few years ago, Ford was on the brink of bankruptcy, weighed down by its huge debt load and burdensome structural costs. But since then, the company has taken numerous steps to dig itself out of its hole. Cutting overcapacity and using global platforms have helped the company be more profitable, and increases in the fuel efficiency of its vehicles tunes into the green energy movement.

The recovery hasn't been easy for Ford, though. Many feared that General Motors (NYSE: GM  ) would have an unfair advantage by taking government help and going through the bankruptcy process to rid itself of its high cost structure. But a struggling Toyota (NYSE: TM  ) , which has dealt with safety concerns and multiple product recalls, has done lasting damage to the idea that Japanese cars are better than American ones, and Ford has capitalized on that trend, passing Toyota to once again become the No. 2 automaker in U.S. sales.

Ford's stock has performed very well lately, but the best days may be coming to an end. Not only do the other members of Detroit's Big Three have their own success stories now, but foreign car companies like Nissan and Hyundai have also done a good job lately. Upstarts like Tesla (Nasdaq: TSLA  ) pose a longer-term threat.

Even if Ford isn't the perfect stock, it shows how a turnaround story can be immensely profitable for those who get in early. Whether Ford continues its winning ways depends on the economy and a host of other factors, but betting against the company has proven a costly thing to do.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Ford to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Ford Motor is a Motley Fool Stock Advisor recommendation. General Motors is a Motley Fool Inside Value selection. 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 Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (14)

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 January 12, 2011, at 1:37 PM, benn44 wrote:

    When Ford decides to return to paying a div. Their stock will hit $30.00.

  • Report this Comment On January 12, 2011, at 1:39 PM, norenore wrote:

    We are long on Ford; as long as UAW Big Men don't get in our way, we will continue to have confidence in the Allay & Barnie team.........

  • Report this Comment On January 12, 2011, at 1:48 PM, mitchjl wrote:

    Union and Ford will work together as both have much to gain and also the stocknolders.

  • Report this Comment On January 12, 2011, at 1:52 PM, Optimyst wrote:

    Short term certainties leading to significant stock price increase:

    1) Ford is going to be upgraded to investment grade by June of this year.

    2) Ford will start paying a dividend beginning no later than 1Q12.

    Long term certainty:

    1) Within four years, Ford will score an easy 7 out of 8 in your factor grid (it'll take a little longer for the dividend measure to catch up).

    For those that haven't gotten in over the past two years, when is the time? NOW, when the stock is still "scoring" low... It's still very cheap compared to where it's going...

  • Report this Comment On January 12, 2011, at 1:57 PM, Optimyst wrote:

    One added comment... The greatest gains come from getting into a stock BEFORE it becomes perfect!

  • Report this Comment On January 12, 2011, at 1:58 PM, Damntough wrote:

    As long as Alan Mulally is running Ford I am keeping my investment right where it is. Do you think for a moment he is sitting back and thinking he is done? No, he is paying down debt and making the company even more efficient. Ford has a long long way to go and I agree with Ben, the stock will hit 30.00. Who's to say it can't hit 50.00 in the next few years.

    I keep hearing people say they wish they had bought the stock at 10.00. Soon they will be saying they wish they had bought at 20.00.

  • Report this Comment On January 12, 2011, at 2:32 PM, archie001 wrote:

    IMHO. the last thing you want from Ford is a dividend. If they institute a dividend it will end the growth cycle of the company and make it an income stock.

  • Report this Comment On January 12, 2011, at 2:41 PM, loki2009 wrote:

    I recommended this stock on these forums back in early 2009 and many Fools came out against me.

    I predicted a surprise operating profit for 3rd Quarter 2009 and even those who agreed with my overall assessment of Ford thought I was too aggressive.

    I predicted an operating profit of $8-10 billion for 2010 and was openly mocked.

    In fall 2009 I said the stock was going to hit $16.00 by summer 2010 and then head to $20 with a target of $25 within two years and many Fools still posted against me.

    I have been buying this stock since the $2.00 level. How have you done who spoke against my analyses and predictions?

    How many of my predictions have been right?

    Another Fact - I have predicted Ford's operating profit (and published those predictions in a Google Forum for Ford) within $150 million for every quarter since the 3rd quarter 2009 and I have made my calls in the first month or early in the second month of those quarters. I have beaten every professional analyst out there.

    How many times will the Fools listen to the naysayers here and not me? How many will be poorer for it?

  • Report this Comment On January 12, 2011, at 2:49 PM, SMOKEN42 wrote:

    HERE WE GO AGAIN...........ANOTHER AUTO ANALYST STRIKES AGAIN....................................MR. CAPLINGER MAKES A SIMPLE MISTAKE.................. YOU DO-NOT GO BACK BEFORE THE TURNAROUND TO ANALYZE FUTURE PERFORMANCE FOR AN AUTOMOBILE COMPANY..................ITS ALL ABOUT PRODUCT AND LEVERAGE AND FORD HAS IT IN SPADES............................

  • Report this Comment On January 12, 2011, at 3:17 PM, denisjhs wrote:

    I'm long in F shares, but have done extremely well owning F-wt, where the leverage has worked even better than the stock. (I own a few thousand warrants bought cheap) I do believe that F has a ways to go to reach the potential and I've sold positions in the past and got back in at 12.52 a share in 2010.

    There's a saying; don't get greedy, from time to time take profits... I've set a target of $24 for F and for the f-wt at 15. Paying down debt is very smart, but I won't be in the stock once they declare that they will restart paying dividends.

  • Report this Comment On January 12, 2011, at 4:36 PM, Varchild2008 wrote:

    "Ford's stock has performed very well lately, but the best days may be coming to an end."

    Huh? Did I miss something? Have I been living under a rock?

    2008 was NOT Ford's best days.

    2009 was NOT Ford's best days.

    2010 was NOT Ford's best days.

    Not when the U.S. Automarket stood at below 12 million annual sales in a market that once did 16 million.

    Ford's 1 Ford strategy is just getting started....

    And the author wants to talk about Ford's best days ending?

    Ford's best days are some years away from now.

    We have an unemployment rate of near 10% or the U6 number at 17% and you want to say 2010 was the Best Days?

    I say the best days are when Ford is operating debt free off the 1 Ford Plan in a U.S. market proucing 15-16 million vehicle sales and an unemployment rate of 6% or better.

  • Report this Comment On January 13, 2011, at 8:38 AM, loki2009 wrote:

    On January 12, 2011, at 1:57 PM, Optimyst wrote:

    One added comment... The greatest gains come from getting into a stock BEFORE it becomes perfect!

    My response: Exactly.

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