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The share price of Ford Motor
Looking back, one could argue that I should have bought my full position all at once and saved the hassle of buying three times as well as avoiding the risk of having only a small position to begin with if the price had run up. And, while the commissions I'm paying are not large at all, they do add to the overall cost of the final position, putting that much extra pressure on the investment.
Well, as I wrote last time I bought Ford, scaling position sizes lets me control the risk in my portfolio by aligning the position size with my perception of the risk inherent in the investment. Further, buying in portions while building up to the final position lets me get more familiar with the company over time and to judge whether or not the investing thesis is working out as planned before committing all the planned funds. That helps alleviate the risk of being wrong with the thesis.
First, I previously pointed out the gains in efficiency that Ford is expecting to see by building more cars off of a single platform as part of the One Ford initiative. In a recent interview with Forbes, chairman Bill Ford gave this example:
The new Focus that's sold in America will be the same Focus you'll see in Europe, Japan, China, and South America. That allows the costs to be spread out over millions of units. It also lets our engineers speed up product development. Anytime the car is changed or improved, the engineers need to do the work only once -- not three or four times. The gasoline, diesel, and electric versions of the Focus will all roll off the same assembly lines, so you can flex production up or down depending on customer demand.
That's efficiency, helping Ford better compete against other auto producers.
Ford's selling more
Second, Ford is seeing higher sales despite decreases in consumer incentives. Here are the numbers for Ford and several of its competitors showing the latest numbers from April:
U.S. Sales Growth (YOY)
Incentive Growth (YOY)
Source: Autodata. YOY = year over year.
The industry's average incentive was $2,320, down 14% year over year and the lowest since October 2005, according to Autodata. While we're still not at the peak sales of a while back, the ability to reduce incentives and grow sales indicates that there's still room to grow auto sales.
Ford's improving its position
Finally, the balance sheet continues to improve. At the end of 2010, it had become net cash positive for the automotive division for the first time in quite a while. During the first quarter of 2011, it improved that position by $3.3 billion through growing cash and reducing automotive debt from $19.1 billion to $16.6 billion. If it keeps up that pace, and there's no reason to think that it won't at this point, then it should be able to reduce its debt to under $10 billion by the end of the year.
Expectations still low
Despite the sales and balance sheet improvements, the market is still pricing Ford as if it will do barely anything ever again. At today's closing price, the expectations priced in are that it will grow free cash flow no more than 2.6% annually for five years, 1.3% for another five years, and then 0% going forward for all time (discounting at my usual, hefty 15% hurdle rate).
Why is the market so pessimistic? Maybe it's because of fears about higher gas prices; maybe its worries about a new recession; maybe it's something else. However, if the market improves its outlook to, say, 10% annual FCF growth for five years (just over half of analysts' expectations for earnings growth), 5% for the following five years, and then 2.5% from then on, shares would be well over $22 each. I don't find that unreasonable. In the meantime, I'm just glad that I'm getting my third tankfull relatively cheaply.
On Tuesday, I'll purchase my last 2% position of Ford, bringing the total allocation up to just over 6% of my portfolio's funding level.
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Fool analyst Jim Mueller owns shares of and has an option position on Ford, but has no position in any other company mentioned. He's an analyst for the Motley Fool Stock Advisor newsletter service. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of Ford Motor and General Motors.
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