As a value-oriented investor, I wouldn't ordinarily suggest looking into a stock that currently trades 465% higher than its price two years ago -- especially an automaker. However, as the past several years highlighted, Ford (NYSE: F) is no ordinary company. While its Detroit brethren crumbled in the jaws of the Great Recession, Ford managed to weather the storm and capitalize on its rivals' weaknesses. But given its relative strengths -- and its own weaknesses -- does Ford's stock appear cheap enough to make it worth researching further?
The positives
Pricing: On the surface, Ford looks flat-out cheap. It trades at 9.1 times its past 12 months' EPS and 6.38 times its cash flow. These figures seem insanely low, considering the S&P 500 currently trades at 16.3 times its past 12 months' earnings. On the other hand, rivals GM (NYSE: GM) and Honda (NYSE: HMC) also trade at a relatively low 8.0 and 11.5 times their respective earnings. And on the high end, Toyota (NYSE: TM), still reeling from the Japanese disaster, sells at 20.1 times earnings.
However, price makes up only one aspect of the value equation. You also have to understand what you get for the price you pay.
Management: Ford has one of the most able and adept corporate leaders at the helm. CEO Alan Mulally received wide praise for his management during the recent recession. The chief executive since 2006, he accurately foresaw the coming economic calamity. Before the credit markets virtually froze, Mulally borrowed nearly $24 billion against Ford's assets, using that fresh capital to maintain operations as rivals clung to taxpayer-funded life support. For his insight and leadership, Mulally received broad recognition as one of the best CEOs in American manufacturing today.
Relative strength versus competitors: This ties largely in with Mulally's bold actions. Ford continued to plow money into its development efforts throughout the recession and allowed the business to continue largely as normal. Its superior products have also allowed it to position itself perfectly for any upticks in auto purchases. And since product development in the automotive industry requires several years from start to finish, Ford's current and more up-to-date product offerings represent the fruit of management's actions years ago.
Weaknesses
Industry economics: Historically speaking, investing in the auto industry was a tough way to make a buck. Brand loyalty usually isn't a must for most car buyers, so automakers have to offer their customers the best overall value mix between price and features to maintain or grow their market share. A race-to-the-bottom kind of mentality can emerge as a result, in which producers offer their products at such steep discounts that their profit margins become paper-thin.
Automakers also have to deal with union obligations that can make producing cars quite expensive. While Ford secured some pretty impressive concessions out of the UAW in 2009, the autoworkers' union has historically proved a challenging counterpart for the Big 3.
And finally, the industry faces sensitivity to commodity prices. The combination of high input prices and weak pricing power has typically led to low profit margins. Companies in this industry compensated by leveraging themselves to the hilt. However, given the lessons of the past several years, that might be one trend that's become a thing of the past.
Oh, and did I mention it's a highly cyclical industry?
Bottom line
Given the overall challenges Ford faces, I still regard it as a pass. I like the company a lot on a relative scale, but there's not a lot of consolation in being the best of the worst. Agree or disagree? Feel free to leave your thoughts in the comments box below.
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