The automakers have not been doing to well since the economic crash in 2008. Recently Ford Motors’ (F) sales in January disappointed, no there is not doubt that the same can be said about Ford’s competitors. Overall, things weren’t relatively strong for the quarter, with some notable weakness, but it appears things are improving. A recent article laid out some strengths for Ford that I will discuss. First, we should discuss profit. Ford’s most recent quarterly pre-tax profit of $1.3 billion was comprised of $924 million from the automotive sector and another $355 million came from Ford’s financial services.
This indicates a growing percentage of income derived from financial services (28 percent in the recent quarter versus $1.7 billion or 19.5 percent for the year). Europe remains a drag on the sector. Ford saw losses of over $1.6 billion in the European market. North America was strong as it contributed$8.8 billion to profit before taxes. One thing is certain and that is, Ford brought in its highest profit from its automotive segment in the last decade despite numerous headwinds, including high unemployment and fiscal uncertainty. There are several reasons to like Ford at current levels.
Net income for the fourth quarter came in at $3.0 billion or $0.74 per share compared to $1.6 billion or $0.40 per share in the year ago quarter. This represents a nearly a doubling year over year. For 2013 Ford saw profits of $7.2 billion or $1.76 per share compared to $5.7 billion or $1.42 per share in 2012, nearly 25 percent higher year over year. While income growth is projected to slow a bit this year, I suspect it will grow nonetheless.
Ford’s dividend growth over the last few quarters and the share price being down 2.5 percent year to date has pushed Ford’s current yield to 3.3 percent. A high yielding play in a low interest rate environment cuts off the downside for the stock. Generally, a selloff that puts a stocks yield over 4 percent is rare and has always indicated a buy, if the broader market was responsible for bringing it down.
Cheap on a Multiple Basis
On a trailing price to earnings basis, Ford appears cheaper than competitors. Be mindful that Ford’s overall earnings are expected to fall in 2014, with estimates pointing around $1.36 per share. That may be conservative and will depend on various factors including interest rates and financing opportunities, competition in Europe and productions costs. At $1.36 earnings a one year forward multiple of just over 10.5 is a good value, based on current share price. For comparison purposes the broader S&P has been in the 16-18 range.
Cash Is Impressive
Ford truly has amassed a good amount of cash over the years. In addition to paying a handsome dividend which could grow, some of that excess cash could potentially be used for big buybacks to reduce the float which would increase earnings per share potential. At the same time, a buyback reduces the number of shares available and as such will give Ford the ability to sustain or possibly increase its dividend once the shares are purchased and eradicated. Of course for day to day operations and production of its automobiles, Ford burns a lot of cash. But it has over $25 billion on hand. For a company valued at $60 billion this is quite impressive. Ford’s debt levels may catch your eye but much of this is due to credit operations. Backing out the cash on hand, the stock is even cheaper.
All things considered, Ford seems primed to motor higher. I rate it as a buy with a $20 price target.
Disclosure: Christopher F. Davis holds no position in Ford and has no plans to initiate a position in the name in the next 72 hours.
Editor’s Note: This article has been updated to correct some statistical misrepresentations.