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?
