Saturday, August 23, 2014

Why I am Bullish on Ford 2/2

Metrics and Valuation (All data came from Morningstar Inc)

This is the second part of my analysis of Ford Motor Inc (F)


Price/Earnings: PE ratio gives you the amount of money you are spending for $1.00 of a company’s earning. A high PE ratio means that the stock is expansive relative to its earnings and may be overvalued. Growth companies tend to have high PE ratios because investors are expecting large earnings growth in the future, even if the current earnings do not justify such a high price. The PEG ratio takes the growth rate into consideration. Any stock with a PEG ratio <1 is considered to be undervalued.

I tend to look at companies that have a PE ratio of 13.00 or below, but it can change dependent on the industry and company. Ford’s PE is 9.07 compared to the S&P 500 PE of 19.39. I believe that Ford is undervalued at this price.

Price/Book: PB ratio is the Price of the stock/Shareholders Equity. This is another valuation that can help investors find undervalued companies. There are some shortcomings to this metric because Shareholders Equity can be easily manipulated. If a company has a low PB ratio (<2.0 I think) then either the company is undervalued or may have financial problems.

Ford has a PB ratio of 2.5, which I think is still a semi undervalued rating.


Return-On-Equity(Net Income/Shareholder’s Equity): ROE is a metric that tells you how efficiently the company is using shareholder’s money. I usually look for an ROE greater than or equal to 18%.

Ford had an ROE of 33.81& in 2013, which means that Ford returned 0.3381 dollars in profit for every shareholder dollar invested.

Return-On-Invested Capital: ROIC is a measurement that shows the rate of return that the company is making off invested capital, such as common equity, preferred shares, and long term bonds. If the cost of capital is greater than the return on invested capital, the company is losing value and vice-versa. The equation for ROIC is: Net Profit after Taxes/Operating Capital

Operating Capital=Average Stockholder Equity + Average Debt Liability

Ford has an ROIC of 6.08% for 2013, while General Motors had an ROIC of 6.42%. Although I usually look for an ROIC between 15%-20%, automobile manufacturers tended to have an average ROIC ratio around 4% for fiscal year 2013.

Dept/Equity: This ratio helps investors determine if the company is actively issuing debt or issuing new shares of stock to raise capital. Ford currently has a debt/equity ratio of 2.9. Though this ratio is high compared to a computer company, auto manufacturers require lots of capital due to the capital-intensive nature of the business. These companies tend to have Debt/Equity ratios above 2.

When conducting financial research, it is important to learn about the financials of other companies within the same sector.

I believe that Ford is undervalued and has very strong growth potential domestically and abroad. China and Africa are two large markets that Ford has just begun to grow in. Ford is also developing innovative solutions to create more fuel-efficient cars. This is very important that a company of this size is still able to make such large changes. Ford is creating value for its shareholders, and I believe that it will continue to.

Disclaimer: I am just a kid with no proper financial training. This report will not guarantee investing success.