Mr. Market's recent slump has treated quite a few big-name stocks unkindly, and Ford
Ford closed below $12 this past week for the first time since January, and despite a rally on Thursday, it was down in the $11s again in trading on Friday. Is there cause for concern, or is this an opportunity to add a strong company to your portfolio?
Back in February, I listed six reasons I thought Ford was a buy. Today I'll offer three reasons I still think it's a buy, along with two concerns that don't change my conclusion but will bear watching.
Reason No. 1: It's cheap again
Auto stocks have historically traded at around 10 times earnings, on average. At a moment when the economy is on an upswing, that might even be a little cheap, but Ford's stock is even cheaper right now. Ford's current price-to-earnings ratio is around 7.9, meaning there's quite a bit of upside left. Or put another way, there's room for gains even if, as Ford's current guidance suggests, the company's profits in 2012 end up about the same as 2011's.
Reason No. 2: The U.S. auto market is trending up
Ford has operations all over the world, but like ancient rival General Motors
That's a big chunk of change, and Ford's sales in the U.S. are still growing, with the company taking care to focus on the most profitable sales. While Ford is unlikely to gain significant market share this year, and may even lose some relative ground as Toyota
Reason No. 3: Ford's product plan is just now coming together
Mulally's signature achievement since joining Ford in 2006 is the product plan that drove the company's turnaround. Called "One Ford," the essence of the plan calls for Ford to offer a single, consolidated line of top-notch products in markets all around the world. That's a departure from Ford's old way of doing things, when it would develop similar-but-completely different cars for different markets like the U.S. and Europe. With fewer new models to develop, Ford can give each one more attention -- and make updates and revisions more frequently. That means stronger, fresher products, which in turn allows Ford to sell them with fewer "incentives," or discounts. That, in turn, should improve Ford's margins.
That has been the theory, anyway, and as the company has brought more and more of its global products under the "One Ford" umbrella, it has worked out just as expected. With the advent of this year's all-new Fusion (called the Mondeo overseas, but the same car) and Escape (called the Kuga overseas), the long-anticipated "One Ford" lineup will be essentially complete, and the company's margins should start to trend further upward. That should improve profits, and good things for the stock price should follow.
Concern No. 1: Overseas operations lag
Ford's doing well at home, but overseas operations remain a work in progress. Europe's economy is hard on every automaker doing business there, and Ford is no exception. Ford's president for the Americas, Mark Fields, recently said that the company's losses in Europe in the first quarter could exceed the $190 million loss it posted in the fourth quarter of 2011. Fields also expects Ford's Asian operations to post a loss, as Ford has lost ground in China despite heavy investment.
There are bright spots, though: Ford is well positioned and investing for growth in Russia and India, two early-stage growth markets that could become massive in coming years. And despite its recent struggles, Ford is on track for significant growth in China by mid-decade.
Concern No. 2: Debt and pensions still weigh
While Ford's current debt is nothing like it was three years ago, when I described it as "surreal," it's still significant. Ford had $13.1 billion of "automotive debt" (its term for debt attributable to its auto business, rather than its financing arm) as of the end of 2011, and while it's well-structured and well-managed, it's probably still weighing on the stock to some extent.
Ford's pensions are also underfunded -- not quite to the same extent as GM's, but not trivially, as the company said its liability was about $15 billion as of the end of 2011. That may require cash infusions over the next few years. On the bright side, Ford had almost $23 billion in cash as of the end of the year, so such infusions are likely to be more of a drag than a crisis. But the liability could weigh on Ford's stock valuation until it's resolved.
The upshot: A good price for a good company with upside
Long story short, Ford is an exceptionally well-managed company with good market position in an industry that is likely to see solid growth as the world's economies continue to recover, with a stock that's selling for significantly less than its historical valuation. There are concerns, but time and patience are likely to resolve them -- and Ford's recent track record, more than anything else, should give investors confidence.
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