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  1. 1. Ford Motor Company August 17, 2010 1
  2. 2. Executive Summary Ford Motor Company is facing number of serious issues. The future is uncertain and the investment world is cautious with the stock. Major Risk Factors include: • Increased competitive challenges • Unexpected decline in expected demand and production • Weaker financial services income • High Pension Costs However, the Company has a substantial potential to turn around its operations and start making significant return on the investment. My recommendation is HOLD while closely monitoring the stock performance as the management continues to restructure the company. 2
  3. 3. Company Overview Since its inception in 1903, Ford Motor Company became the second-largest domestic automobile manufacturer. The Company manufactures and distributes automobiles in 200 markets across six continents. Ford has a significant presence in international markets and its foreign operation accounted for about 44% of its vehicle sales in 2005. Its core and affiliated automotive brands are Ford, Lincoln, Mercury, Volvo, Aston Martin, Jaguar and Land Rover. The Company also owns 33% stake in Mazda. In addition, Ford and its subsidiaries provide an extensive range of automotive-related services. Financial Services group includes Ford Motor Credit and American Road Insurance and provides financial services such as vehicle-related financing, leasing and insurance. Ford produces many of it vehicles’ plastic, glass, electronic and replacement parts through one of its subsidiaries, Genuine Parts & Service. Ford was engaged in car rental business. However, in December 2005, Ford sold Hertz Corporation for approximately $15 billion, including $5.6 billion in cash. Ford has about 300,000 employees worldwide. However, the Company began decreasing the workforce as a part of ongoing attempts to turn its North American operations to profitability by 2008. Ford plans to cut up to 30,000 jobs worldwide and close 14 plants in North Americas by 2012. According to analysts, this should bring the Company close to full capacity (Value Line). Market Position & Competition The difficulties of Ford Motor Company and American automakers in general are well known to the investment world. Ford has been struggling to stop the market share loss to its competitors. Recent headlines captured the financial trouble of General Motors. The need for change to turn around American auto manufacturers is obvious. However, both Ford and GM have been ineffective so far in their efforts to strengthen their positions and compete effectively against Japanese automakers that have enjoyed solid market share gains. Ford Motor has been losing the market share in the US for at least seven consecutive years. It decreased from nearly 25% in 1998 to slightly above 18% in 2005. Although, the data for 2006 is not available yet, the consensus among financial analysts predicts further decline of Ford’s market share in the United States. The market share growth in Europe has been stagnant and increased to only 10.8% from 10.0% over the same period of time (see complete details in the Exhibit A). According to Value Line, the battle for US automobile market share will intensify further in the coming 6 to 18 months as the companies will start rollout of new vehicles in the last quarter of 2006. Exhibit B compares financial figures of major competitors and the changes since the opening of the position. Toyota continues to dominate Ford, GM and DaimlerChrysler. Its market cap is larger than that of the Big Three together and shows and Toyota delivers exceptional performance with fewer employees. There are several signs of deterioration of Ford from the previous period. Revenues have declined while the other three companies posted higher sales. Quarterly growth turned negative and the company is expected to post a loss for the year from a $2.23B profit in 2005. Operating margin (ttm) turned negative from the previous period. This should not come as a surprise since the previous 1% margin did not provide a lot of margin for fluctuation. Ford will have to improve drastically its automotive business 3
  4. 4. profitability and effectiveness in order to survive this battle and to reverse the declining market share in the United States. As a part of the company’s ongoing restructuring, Ford is considering the sale of some of its assets. No final decision has been made but some of the assets in questions are Aston Martin, Land Rover, and Jaguar. These brands are a part of the Premier Automotive Group and analysts believe that the sale will lower losses of PAG operations. A recent Wall Street Journal article mentioned that Ford may sell its financing business unit as well. However, no definite decisions have been made so far. ECONOMIC AND INUSTRY ENVIRONMENT Ford and Automobile Industry Over the last five years automobile industry performed very poorly. Although, year-to-date performance of the automobile industry has been an impressive 22% gain, it still lags behind the DJ US total market index. Furthermore, the sustainability of this recovery is questionable. The full impact of climbing interest rates and higher gasoline prices on the automobile industry has yet to be seen. Some automakers including Ford already feel the adverse impact as consumers are looking for fuel-efficient vehicles. As a result, sales of SUVs and trucks have slumped. According to Ford’s monthly sales data for August, truck sales were down 16% from last year’s sales. Finally, higher interest rates will eventually hurt Ford’s financial services group that remained profitable and offset continuous losses of the North American Automotive Group. Performance of Ford Motor stock price has been consistently worse that the automobile industry. Although year-to-date figures show minor improvement, the Company still lags behind its peers. The stock has gained some momentum in the past three months putting Ford in line with the rest of the industry. The optimism of investors is dubious since the analysis of Ford’s financial statements does not explain this sentiment and for the most part shows signs of deterioration of the financial health since the addition of Ford stock to the Truman Tracy Investment Fund. Performance DJ U.S. Total Ford Motor Automobiles According to the Value During Past: Market Index Line research, pension 3 Months 16.48% 16.01% 1.13% fund liabilities and strong 6 Months 4.03% 18.60% 0.93% reliance on larger vehicles Year-to-Date 7.12% 21.26% 4.91% will continue to put Ford 12 Months -15.01% -1.51% 7.41% 2 Years -40.50% -24.59% 21.40% as well as other US 5 Years -58.38% -45.70% 20.75% automobile manufacturers at 4
  5. 5. a competitive disadvantage against Japanese automakers who continue to steal market share from the Big Three. While the stock of the Company is slowly climbing up for now, much depends on the management’s ability to deliver on its promises to quickly turn around the company’s automotive operations to profitability. VALUATION Based on the 2nd quarter balance sheet figures, the book value of Ford is $7.33. This number will be used as a minimum share price of the company. Valuation models that produce a number lower than $7.33 per share will be considered inappropriate. Risk-free rate will be based on 10- year government bond, which is currently at 4.78%. Using one of the valuation spreadsheets from Damodaran Online, the required rate of return turned out to be 6.8% (Exhibit C). The 2- stage Discount Cash Flow model was used to estimate the stock price. The 1st stage assumed 1% growth to reflect current difficulties and the 2nd stage growth rate is 5% to show some improvements after company restructuring. The input for the Net Income was normalized using 10 year average to $346,700,000. The model returned $7.70 per share Exhibit D). I believe this stock price more or less is the intrinsic value of the company. The stock price recently traded at $8.80 and reflects the renewed optimism of investors. FINANCIALS Common Size Income Statement Most items on the Income Statement have been showing signs of corrosion. Although revenues have increased for five consecutive years, Cost of Goods Sold has increased as well. Cost of Goods Sold represented a record 78% of sales in 2005 and for the two quarters of 2006, the figure climbed to 92% of sales. Meanwhile, there is no positive change in Net Income Margins and Gross Operating Margin has been decreasing (See Exhibit E for full details) resulting in a loss for the two quarters in 2006. Common Size Balance Sheet Exhibit F shows the balance sheet data for the past five years as well as the select data from the 2nd quarter of 2006. Cash and Cash Equivalents increased as a percentage of total assets from 2.6% in 2001 to 11.7% in 2005 but then dropped to 10%. This increase may be viewed both as positive as well as negative sign. Ford has more money to pay for its large debt load. At the same time, the company may not have many promising projects to pursue. The rapid increase in Receivables to 41% of total assets is alarming. The Company is making sales but is not collected cash. The increase in Sales matched with an unparalleled increase in Receivables will not contribute to the Company’s long-term success and may even hurt it significantly. The Inventories as a percentage of total assets has increased somewhat over the last five years. Overall, Total Assets have decrease moderately and if in 2001 non-current assets accounted for 87% of total assets, in 2005 they account for only 26%. Debt plays an important part in the Ford’s capital structure. In 2005, total liabilities accounted for 95% of total liabilities and stockholders’ equity. The Company regularly repays and reissues debt. Overall, percentage of debt as source of capital has not changed significantly in the past 5 5
  6. 6. years. However, if the Company continues to pursue this approach, the rising interest rates will have strong negative impact on its cash flow. Cash Flow Statement Large cash flow from Investing Activity ($7,937) was contributed form the sale of Hertz rental business unit. As part of its financing activities, the company regularly repaid more than it borrowed (See Exhibit G) for full disclosure of Cash Flow Statement). OTHER CONSIDERATIONS Management Quality On September 5, 2006, William Ford stepped down as the CEO of Ford but will continue to serve as an executive chairman. He was replaced by Alan Mulally, a top Boeing executive, who is credited for the resurgence of Boeing’s commercial airlines unit. The market seemed to applause the announcement and the stock price rose by 5% in after-hours trading. Standard & Poor’s last stock report sounded concern about Ford’s corporate governance and particularly the dual class capital structure that gives Ford family greater voting rights than regular shareholders. Warren Buffett advocates using company annual reports to evaluate management’s sincerity and integrity. He states that reports should be clear and understandable to an average person. Annual Report of Ford is complex and difficult to read. Ford is a large corporation with numerous global operations, subdivisions and complex capital structure. It is understandable that its annual reports may sound complex. But even the tone of voice is sometimes unrealistic. It is very upbeat and full of optimism and determination but does not address possibility of serious difficulties in a straight forward fashion. Finally, the letter to shareholders describes how much company cares about the employees but the regret of letting thousands of other workers being fired could not be easily founded. Analyst Recommendations The sentiment among analysts covering the Ford Motor Company is bearish. Majority of the analysts recommend holding, reducing or selling the positions in Ford. However, the sentiment shifted slightly towards holding from selling based on analyst ratings provided by Yahoo Finance and On the other hand, more analysts turned bearish on Ford according to data collected by the Wall Street Journal. Overall, very few analysts recommend buying the shares of Ford at this time. Exhibit H displays the recent trends of analyst ratings. Institutional Ownership Large institutions increased their holdings of the Ford Motor Company over the past several months. The institutional ownership of Ford shares increased from 45% in December 2005 to 67% in June 2006. The holdings of top 10 institutions doubled to 45% over the same period of time. Noticeably, US Trust significantly increased its holdings to 17% of Ford’s outstanding shares. Brandes Investment Partners, the second largest institutional holder, increased its position by 7%. Complete data of institutional ownership is provided in the Exhibit I. 6
  7. 7. Exhibit A: Total Unit Sales Year Worldwide Vehicle Sales US Market Share European Market Share 1998 na 24.6% 10.0% 1999 7,220,000 23.8% 10.2% 2000 7,424,000 23.7% 10.0% 2001 7,008,000 22.8% 10.7% 2002 6,973,000 21.1% 10.8% 2003 6,736,000 20.5% 10.7% 2004 6,798,000 19.3% 10.9% 2005 6,818,000 18.20% 10.8% Exhibit B: Major Competitors Comparison (over 6 months) September 4, 2006 Ford DaimlerChrysler General Motors Toyota Industry Market Cap: 15.56B 54.16B 17.12B 175.83B 54.33B Employees: 300,000 382,724 335,000 285,977 300.00K Qtrly Rev Growth (yoy): -5.80% 0.40% 12.20% 13.20% 3.20% Revenue (ttm): 170.43B 199.40B 205.00B 185.33B 185.33B Gross Margin (ttm): 5.69% 18.66% -0.26% 19.44% 18.66% EBITDA (ttm): 11.10B 22.97B 2.16B 29.35B 11.10B Oper Margins (ttm): -1.65% 2.99% -7.09% 9.15% 7.83% Net Income (ttm): -1.34B 5.06B -11.15B 12.62B 5.04B EPS (ttm): -0.79 4.928 -19.913 7.78 1.47 P/E (ttm): N/A 10.79 N/A 13.94 18.79 PEG (5 yr expected): N/A 6.41 1.16 N/A 1.16 P/S (ttm): N/A N/A N/A N/A 0.95 March 6, 2006 Ford DaimlerChrysler General Motors Toyota Industry Market Cap: 14.34B 55.98B 11.20B 171.11B 53.25B Employees: 300,000 382,724 327,000 265,753 300.00K Qtrly Rev Growth (yoy): 3.6% na -1.2% 14.8% 5.60% Revenue (ttm): 177.09B 177.37B 192.60B 173.35B 177.09B Gross Margin (ttm): 8.21% 3.46% 1.53% 18.27% 18.27% EBITDA (ttm): 16.10B 21.40B 5.82B 24.35B 16.10B Oper Margins (ttm): 1.00% 3.46% -5.34% 8.30% 7.89% Net Income (ttm): 2.23B 3.37B -8.45B 10.82B 3.37B EPS (ttm): 1.048 3.32 -15.14 6.61 2.19 P/E (ttm): 7.34 16.51 na 15.92 15.99 PEG (5 yr expected): 2.07 2.05 na 2.9 2.07 P/S (ttm): 0.08 0.31 0.06 0.99 0.66 Exhibit C: Estimation of Current Cost of Capital 7
  8. 8. Equity 1,881,010,0 Number of Shares outstanding = 00 Current Market Price per share = 8.8 Number of Warrants Outstanding = 0 Current Market Price per Warrant = 0 Current Beta = 1.89 Riskfree Rate = 4.78% Risk Premium = 4.84% Debt 152,209,000,0 Book Value of Straight Debt = 00 7,643,000,0 Interest Expense on Debt = 00 Average Maturity = 5 Pre-tax Cost of Debt = 7% Tax Rate = 15% Book Value of Convertible Debt = 0 Interest Expense on Convertible = 0 Maturity of Convertible Bond = 0 Market Value of Convertible = 0 Debt value of operating leases = 0 Preferred Stock Number of Preferred Shares = 0 Current Market Price per Share= 70 Annual Dividend per Share = 0 Output Estimating Market Value of Straight Debt = $ 139,860,722,395.98 Estimated Value of Straight Debt in Convertible = $ - Value of Debt in Operating $ leases = - Estimated Value of Equity in Convertible = $ - Equity Debt Preferred Stock Capital Market Value $ $ $ $ 16,552,888,000.00 139,860,722,395.98 - 156,413,610,395.98 Weight in Cost of Capital 10.58% 89.42% 0.00% 100.00% Cost of Component 13.93% 5.95% 0.00% 6.79% 8
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  15. 15. Sources Ford Annual Reports Ford Financial Result MSN Money The Standard & Poor’s The Value Line The Wall Street Journal WRDS Database Yahoo – Finance Disclaimer: This analysis does not necessarily reflect the beliefs of the University of Missouri- Columbia or the College of Business. The insights and opinions are of the students of Investment Funds Management and should not be used in personal investment decisions. The University of Missouri and the author of this analysis take no responsibility for the validity of the valuation and analysis. 15