Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Highest Dividend Yields Among Undervalued Enterprising Companies.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Ford Motor Company (F)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â 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||$27.81|
|Value Based on 0% Growth||$16.30|
|Market Implied Growth Rate||-0.10%|
|Net Current Asset Value (NCAV)||-$6.26|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Ford Motor Company is suitable for Enterprising Investors but not for Defensive Investors. Â Defensive Investors have concerns with the lack of earnings stability over the last ten years as well as the lack of a strong dividend history over that time frame. Â The company passes all of the requirements of Enterprising Investors, though. Â As a result, Enterprising InvestorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors by exploring theÂ ModernGraham Valuation Index.Â Â From a valuation perspective, the company appears to be undervalued currently, after growing its EPSmg (normalized earnings) from negative $1.14 in 2010 to an estimated $1.92 for 2014. Â This demonstrated level of growth dwarfs the market’s implied estimate of a negative 0.10% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls well above the market price at this time.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Ford Motor Company (F)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author held a long position in Ford Motor Company (F) but did not hold a position in any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.