Has Ford Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Ford (NYSE: F  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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%

(1.3%)

Fail

 

1-year revenue growth > 12%

(4.7%)

Fail

Margins

Gross margin > 35%

14.1%

Fail

 

Net margin > 15%

13.4%

Fail

Balance sheet

Debt to equity < 50%

525.7%

Fail

 

Current ratio > 1.3

1.68

Pass

Opportunities

Return on equity > 15%

140.2%

Pass

Valuation

Normalized P/E < 20

10.56

Pass

Dividends

Current yield > 2%

3.1%

Pass

 

5-year dividend growth > 10%

NM

NM

       
 

Total score

 

4 out of 9

Source: S&P Capital IQ. NM = not meaningful; Ford restored its dividend in Jan. 2012. Total score = number of passes.

Since we looked at Ford last year, the company doubled its score, more than making back the single point it dropped from 2011 to 2012. A big boost in the dividend and an improving balance sheet helped boost the company's score, but the stock has had to rally sharply in the past few months just to eke out a 5% gain over the past year.

The key to understanding Ford's success is to realize that unlike competitors Chrysler and General Motors (NYSE: GM  ) , Ford never declared bankruptcy, yet it managed to restructure itself more successfully. With huge production levels at its U.S. factories and a wide range of globally viable vehicles available, Ford has turned things around at home impressively. Japanese rivals Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) have taken notice, even as they've managed to bounce back from the Japanese earthquake and tsunami in early 2011 to regain lost ground in the U.S. market.

Moreover, China has been a big winner for Ford. The company saw sales nearly double in the emerging-market nation in January, with popular vehicles like its two Focus models and its Escape-clone Kuga SUV doing quite well there. Ford hasn't done quite as well in India, where Tata Motors (NYSE: TTM  ) still has a big edge and has captured the low-end market, but it has planted the seeds to benefit as that market matures.

In its most recent quarterly report, Ford's results showed the differences in the regions that the automaker serves. The company posted a pre-tax profit of $1.7 billion for the quarter, but most of that came from strength in North America. For the full year, Ford lost $1.75 billion in 2012 and expects to lose another $2 billion there this year. But if the One Ford plan does as well in Europe as it did elsewhere, then Ford may well fare much better than GM in Europe in the long run.

For Ford to keep improving, it needs to work on finding ways to get revenue growth moving in the right direction. That probably means jump-starting Europe, and while that may take a while, it's the key toward getting Ford closer to perfection in the years ahead.

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.

Learn more about Ford's prospects by reading the Fool's premium research report on the automaker. Inside, one of our top stock analysts takes a look at the company inside and out, assessing whether Ford is a buy right now and giving his reasons why. Don't miss out; click here to get instant access to this premium report.

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


Read/Post Comments (4) | Recommend This Article (6)

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 February 09, 2013, at 3:51 PM, mistacy wrote:

    Here is one more person who finds a way to look at Ford's numbers & sh*t on this highly performing company. Ford has achieved over the last 5 years what just a handful have. Success. Ford is ahead of many US companies in management & growth positioning. In its sector, Ford is a leader among its US rivals, & close to the top internationally elbow to elbow with Toyota. Sure Ford has to keep working hard to keep its place & stay ahead. But is not it obvious that the company is doing really well & that with the potential of an economy recovering even slowly Ford is going to outperform. Short term a pull back is possible due to the recent big rally of the share price. However, longer term, the stock should rise steadily. Look for institutional investors to keep coming aboard this solid stock. If you ask me, take a long position in Ford now. Enjoy a a 3+% dividend for now. & most likely a serious stock price increase.

  • Report this Comment On February 09, 2013, at 10:22 PM, belseware wrote:

    Here we go again...

    First, you're comparing Ford to the ideal company, irrespective of industry or sector. That's fine for the general investor who won't ever touch automotives because they don't have the margins of many others. But Ford has done very well getting its margin up, and is leading automakers whose stock is--mysteriously--doing better.

    Second, again, the secured debt of Ford Motor Credit is counted in overall debt, when it is a horse of a different color. Any casual investor will look at that and shy away...meanwhile, GM was deprived of their finance arm, and don't have this confusion, due to poor management.

    ...for the good things you have to say about Ford, thank you.

  • Report this Comment On February 12, 2013, at 12:26 PM, kevin311 wrote:

    Ford is doing great things. Ford's stock is not and has not for many years. So no, it is not the perfect stock.

  • Report this Comment On February 12, 2013, at 12:26 PM, kevin311 wrote:

    Ford is doing great things. Ford's stock is not and has not for many years. So no, it is not the perfect stock.

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