There seems to be a lot of disagreement in the market regarding how much Ford Motor Company is worth, and a great deal of it is due to speculation about the company’s prospects. Many will decide whether to invest based solely on the arguments made for or against the company, but Intelligent Investors will base their decisions on the fundamentals. Benjamin Graham taught us to not speculate regarding our investments, but rather to base our decisions on factual data. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Ford Motor Company fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Ford Motor Company (Ford) is a producer of automobiles. The Company together with its subsidiaries is engaged in other businesses, including financing vehicles. The Company operates in two segments: Automotive and Financial Services. Automotive includes Ford North America, Ford South America, Ford Europe, and Ford Asia Pacific Africa region. Financial services include Ford Motor Credit Company and Other Financial Service. The Company manufactures or distributes automobiles across six continents. Its automotive brands include Ford and Lincoln. Other Financial Services includes a range of businesses, including holding companies and real estate. Effective September 26, 2013, Ford Motor Company acquired Livio, a developer of software.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$32.28|
|Value Based on 0% Growth||$18.92|
|Market Implied Growth Rate||-0.82%|
|Net Current Asset Value (NCAV)||-$6.04|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Ford Motor Company remains unsuitable for the Defensive Investor due to its lack of stability in earnings and dividends over the ten year period. The Enterprising Investor looks at a much shorter time horizon, though, and the company passes all of the requirements of this investor type. As a result, Enterprising Investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods will feel comfortable proceeding with further research. An example of further research would be to look at other companies that pass the ModernGraham requirements through a review of ModernGraham Stocks & Screens. As for a valuation, the company performs well in the ModernGraham valuation model after growing its EPSmg (normalized earnings) from -$3.60 in 2008 to $2.23 for 2013. This solid level of growth is not reflected by the market, as the market is currently implying a growth rate estimate of -0.82%. In other words, the market price indicates an expectation that the company’s EPSmg will shrink by 0.82% annually over the next 7-10 years. Clearly this assumption is not supported by the historical achievements of the company, and the ModernGraham valuation model accordingly returns an intrinsic value estimate that exceeds the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Ford Motor Company (F)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
If you like our valuations, why not check out ModernGraham Stocks & Screens? It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: The author held a long position in Ford Motor Company (F) at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.