How High Is Ford’s Potential?

With shares of Ford Motor Co. (NYSE:F) trading at around $15.08, is F an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Ford has a lot going for it at the moment. An attempt will be made to cover all the biggest potential catalysts, but that’s not an easy task.

Let’s begin overseas. Ford expects sales to increase 50 percent in China by 2015. Ford is expanding in China, and 15 models will be introduced within the next 2.5 years. Of course, this will require more plants, which means increased spending. However, the auto market is strong in China, aided by government-backed investments and easy credit. Another positive for Ford is that Chinese consumers are shying away from Japanese brands, such as Toyota and Honda. This relates to an ongoing dispute over islands in the East China Sea. Ford’s sales have increased in China, and it has been stealing market share from competitors.

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Russia also presents good potential. Ford Sollers is accelerating growth in Russia. A new engine plant and the launch of the Ford EcoSport SUV are expected within 18 months. There will now be seven models built by Ford Sollers opposed to just two models. Adil Shirinov, executive director and chief operating officer of Ford Sollers, recently stated:

“The demand for Ford SUVs is growing in Russia, and we’re pleased to announce that next year our already strong lineup of SUVs will be supplemented by the Ford EcoSport, Local production of the EcoSport by Ford Sollers in Tatarstan will help to strengthen the Ford brand position in Russia’s popular SUV segment.”

In regards to Europe, Allan Mulally wants to be profitable by 2015. This will require cutting operations and making the company leaner and meaner. Europe’s unemployment rate is still approximately 12 percent, and auto sales have been atrocious. However, Jim Cramer recently made an optimistic comment related to Europe: “Europe is bottoming. I think Ford is a buy. Don’t just quote me because John Chambers of Cisco says Europe is bottoming, and that’s fabulous for letter F.” It’s more likely that monetary stimulus is going to have a temporary positive impact than Europe is actually bottoming and all skies are clear ahead.

As far as the domestic market is concerned, Ford sales increased 18 percent year-over-year in April. By comparison, General Motors Company’s (NYSE:GM) sales increased 11 percent year-over-year, and Toyota Motor Corporation’s (NYSE:TM) sales increased 1.1 percent year-over-year.

A company’s culture is often a clear indication of employee optimism and production potential. Ford’s company culture is strong. According to, employees have given their employer a 3.5 of 5 rating, and 70 percent of employees would recommend the company to a friend. Even more impressive is that 94 percent of employees approve of CEO Alan Mulally. This is a sign of excellent leadership.

Many people feel as though Ford has a debt problem. However, that’s not the case. We’ll get into this in this on the next page. For now, let’s take a look at some numbers before forming an opinion on the stock. The chart below compares fundamentals for Ford, General Motors, and Toyota.

Trailing P/E 10.22 11.51 16.47
Forward P/E 9.08 7.71 N/A
Profit Margin 4.27% 4.00% 4.36%
ROE 33.97% 15.15% 9.09%
Operating Cash Flow 7.18B 8.92B 31.15B
Dividend Yield 2.90% N/A 1.10%
Short Position 2.00% 7.50% N/A

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Strong

Ford has been a steady performer over the past three years. Toyota has claimed the number one spot for this group over a three-year time frame, and that has potential to continue, but all three companies are poised for near-term success.

1 Month Year-To-Date 1 Year 3 Year
F 15.55% 17.93% 51.87% 28.47%
GM 13.57% 16.09% 52.76% 3.33%
TM 12.94% 36.27% 67.04% 73.51%

At $15.06, Ford is trading above its averages.

50-Day SMA 13.44
200-Day SMA 12.73

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Ford is much weaker than the industry average of 0.80. That being the case, you might be wondering why the debt-to-equity ratio is categorized as Normal. It’s because the debt-to-equity ratio would be much lower if it excluded Ford Credit.

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Ford Credit has been performing very well. It takes on low-interest consumer loans and turns them around on consumers for considerable profits, over and over again. The best part is that these low-rate loans are secured for the long haul, which means profits will be even bigger when interest rates increase. However, when interest rates increase, auto sales are likely to weaken.

Debt-To-Equity Cash Long-Term Debt
F 5.99 24.18B 107.60B
GM 0.48 24.31B 18.42B
TM 1.11 30.73B 179.57B

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry (for now)

Auto sales have been strong everywhere expect for Europe. This trend is likely to continue considering everyone is printing money. It’s the biggest party that never ends! Yes, that was sarcasm. The point here is that the party has been extended. As long as real estate and stock prices continue to appreciate, auto sales will do well. All that said, the eventual hangover from this party will last many years.

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Ford has one of the best leaders around in Alan Mulally. This is the most important factor. For those who put their trust in analysts, they like the stock: 10 Buy, 9 Hold, 2 Sell. For those who trust valuation, Ford is currently trading at 10 times earnings while the industry average is 19.5 times earnings. And for those who like yield, Ford currently yields 2.90 percent (higher than peers).

Needless to say, Ford is an OUTPERFORM.

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All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions.