I've heard many discussions regarding whether Ford (F +1.88%) is fairly valued as it sits around $15.68 per share, or if it's a strong value play with a lot of upside. I decided to dig into some numbers and create a simple estimate on how quickly Ford's pre-tax income could grow by the end of 2015. I'll then explain a few of the caveats that are left out of the estimate -- because there are plenty.
We'll start cautiously by using Ford's 2012 pre-tax income of $7.7 billion. This number will be higher than the net income we would eventually see, but I'm not going to speculate on what tax rates Ford will pay. We'll break it down, then total it up, and you might be surprised at the pre-tax income growth Ford could offer investors over the next two to three years.
North America
It makes sense to start here in the homeland, where Ford derives nearly all of its profits right now. Just how much, you ask? Take a look.
The U.S. automotive market has picked up steam in 2013, helped by a gradual rebound in the economy overall and the housing industry. Thanks to the latter, we can expect demand for the F-Series pickup to remain strong, helping Ford maintain its recently reported 11% operating margin.
In two years, the U.S. market is expected to exceed 16.4 million vehicles sold, and using Ford's recent market share of 15.9%, that would bring in an incremental 175,000 vehicle sales. Because the F-Series can sell for almost twice the amount of other vehicles in Ford's lineup and is the company's No. 1 selling vehicle, we'll say the average invoice price is $36,000. At the 11% margin, that would bring in roughly $692 million in pre-tax income. By adding that to our base number, we're sitting at about $8.4 billion so far.
China
China is where Ford hopes to get a large return on its investment to pad the bottom-line figures as the decade progresses. Ford is trying to expand market share in China at an unprecedented pace by releasing 15 new vehicles by 2015. The plan is to double its market share from 3% to 6% by mid-decade. By 2020, China's market is expected to expand from just over 19 million vehicles to 35 million. We'll be cautious in case growth is slower than expected in the short term, and we'll say China hits 24 million in 2015.
If we use Ford's goal of 6% market share -- with a vehicle invoice averaging $30,000, which might be the only estimate that's not conservative -- that would bring in revenue of $43.2 billion. Let's take that number and cut it in half from the joint ventures taking their slice of the pie. Then let's apply a thinner margin of 5%, with no F-Series bringing home absurd margins. That brings us to a cautious $1.08 billion in pre-tax income -- bringing our total 2015 estimate to nearly $9.5 billion.
Now let's look at Europe and get a feeling for why it has -- in my opinion -- held Ford's stock price down.
Europe
As Ford executives reiterated during Wednesday's conference call, they expect to bring the losses in Europe to an end by the close of 2015. Even if the company merely breaks even, at an estimated 2013 loss of $2 billion, the cash would go straight to the bottom line.
Recently I've been touting that Ford's Credit division has been responsible for offsetting European losses -- returning $1.7 billion pre-tax last year. Ford Credit has taken on more than $80 billion in long-term, low-interest-rate debt that it dishes out to consumers buying vehicles -- at a higher interest rate.
Two things can happen to inflate profits from with Ford's Credit division. One is that interest rates rise across the board while Ford's long-term loan interest remains low, allowing Ford to increase its profit margin on each loan. I don't expect much help on this front by 2015. Second, as the economy improves -- we hope -- the number of people taking loans to purchase vehicles will increase.
If the first-quarter pace continues, this year Ford Credit will earn $2 billion in pre-tax profit, and to be cautious we'll just stick with that number through 2015, resulting in a $300 million pre-tax income addition to our number.
Bottom line
At the starting point of $7.7 billion, adding in all the figures we covered from North America to Ford Credit, we sit at a 2015 estimated pre-tax income of $11.8 billion. That's a 15% annual growth rate over three years. I don't think it seems out of reach next to analysts' estimates of about 10%.
I've learned when estimating that it's usually best to keep things simple, as we did. That said, in doing so there's an incredible amount of caveats in this estimate. It doesn't account for how much structural costs will increase as Ford continues to heavily in China. We also have to consider Ford's pledge to pay into its underfunded pension billions more than required in the years to come. It's even possible if things continue to go well that management could announce an increase to the dividend by mid-decade.
What do you think about that simple estimate? Is it attainable? At the very least, this all should give you a better idea of how fast Ford could grow its pre-tax income when losses in Europe subside and market share is gained in China. Ford has a ton of room to run globally, and that potential is hard to measure -- but the upside sure looks appealing!
