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Ford Motor Co. 1.doc Ford Motor Co. 1.doc Document Transcript

  • Ford Motor Co. (F) Brian Busch Date: 2-20-2004 Consensus Estimate 9/03A 12/04E 12/05E Sector: Consumer Cyclical EPS 0.50 1.30 1.58 Industry: Automobile Manufactures P/E 28.55 11.12 9.15 Current Price: $14.45 Long Term Growth Rate: 4.75% 52 Wk Price Range: $6.58-$17.34 Ratio Analysis Co. Indus. Sector SP500 Ave. Daily Vol: 12.33 million P/E (TTM) 28.55 45.51 29.57 25.11 Beta: 1.3 P/S (TTM) .16 .31 1.15 3.57 Market Cap ($million): 25,760 P/B (MRQ) 2.35 2.09 3.27 4.52 Shares Out (million): 1831 ROA (TTM) .40 .85 5.49 6.48 Inst. Hold %: 33.7% EBO Valuation $10.49 Div Yld: 2.80 Recommendation: Hold Total Debt/Equity: 22.01 Stop-loss Price: 11.50 Member S&P 500? Yes Price 6-mo prob 12-mo prob Target Price $17.50 30% 45% Investment Thesis Summary Fundamental Valuation: • Ford believes that 2004 earnings estimate of Negative—Based on a discount rate of 10.8%, $1.20-$1.30 is on target, which is an EPS Ford’s EBO valuation is $10.49. Changing the increase of approx. 150% over 2003. I feel the discount rate to 7.8% yields an EBO valuation of market has under-reacted to this information. $14.44. One year forward P/E is 11.12, well below industry and sector averages. Relative Valuation: Negative/Neutral—The P/E and P/S indicators • Ford is facing increasing competition for are bullish while the PEG, P/B and Value ratios market share from domestic and foreign are bearish. automakers. They are releasing several new and revamped models in 2004-2005 in an Technical Analysis: effort to boost enthusiasm for the Ford Neutral—Stochastics and regression indicate a vehicles. downward move, while momentum and MACD are indicating a price increase. Bollinger Bands • Ford is expanding to developing nations such and moving averages give no indication. as China and Singapore. They are building a $1 billion production facility in China. Ford is Earnings Analysis: behind GM and Volkswagen expanding into Positive—Ford has had positive earnings this market. Ford is hoping that the location surprises in each of the last five quarters. In of the facility—with its access to a more addition, in the last four weeks up revisions talented workforce—will allow them to make outnumber down revisions for FY 2004 &2005. up for loss time. Analyst Recommendations: Neutral—The mean recommendation is a 3.07. • Planning to release company’s first gasoline- This is up slightly from an average of 3.13 one electric hybrid vehicle in late summer 2004— month ago. Ford Escape Hybrid. This SUV is larger and more spacious than the smaller Japanese Institutional Ownership: hybrid cars currently on market. Features such Negative/Neutral—The number of investors as the brake regeneration technology should have decreased by 14.55%, while the number of make it hybrid market leader. shares held has increased by .06%. 1
  • Company Summary Ford Motor Co. is the second largest manufacturer of automobiles in the world, behind General Motors. The Lincoln, Mercury, Ashton Martin, Jaguar, Volvo (since 1999), and Land Rover (2000) brands are all owned by Ford Motor. Ford also owns a 33% stake in Mazda. In addition to automotive manufacturing Ford also has a Financial Services division under which Ford Motor Credit, American Road Insurance Co., and Hertz Corp. operate. In 2003, earnings from Ford financial services division accounted for just under 97% of the companies total earnings. In 2002, earnings from financial services accounted for 113% of total earnings as Ford had a loss from the automobile division. Divisional and regional earnings for 2003 and 2002 are as follows:1 Division–Region 03 Op Earnings % 03 Op. Earnings 2002 Earnings 02-03 Change (in millions) (in millions) (millions) Auto-N. America $1,762 51.34% $2,500 ($738) Auto-S. America ($130) -3.79% ($622) $492 Auto-Europe ($1,113) -32.43% ($549) ($564) Auto-Asia Pacific ($25) -0.73% ($176) $151 Auto-PAG $164 4.78% ($740) $904 Auto-Intrntnl $69 2.01% ($15) $84 Auto-Other ($623) -18.15% ($641) $18 Fin Serv-Ford Credit $1,800 52.45% $1,200 $600 Fin Serv-Hertz Corp. $228 6.64% $200 28 Fin Serv-Ins 1300 37.88% 704 596 Total $3,432 100.00% $1,861 $1,571 Competition and Strategy Ford recently fell to number three as the world’s largest automaker, behind GM (#1), and Toyota. Their biggest domestic competition comes from General Motors and Daimler Chrysler. Each of these automakers has been pressed for market share to outside competition, namely Nissan, Toyota, and Honda. As the competition continues to increase profit margins will get smaller. As a result, a majority of Ford’s profits has come from their financial services division as stated above. In an effort to maintain their market share, Ford is making several aggressive moves. They already have or are planning to release several new or revamped models for 2004-2005. General Motors also has a similar strategy in the domestic market as they plan to release 10 new models before the end of 2005.2 In effort to increase their profit margins, Ford is aggressively looking to cut costs. They are becoming open to new suppliers whereas they used to be loyal to reliable suppliers. In the face of ever increasing competition Ford sees it necessary to find the lowest prices as long as quality and reliability remains intact. The treat of looking overseas for new suppliers has given Ford some bargaining power with their current suppliers to drive down prices. Ford is also trying to get a foothold on the expanding Chinese market. They recently announced that they plan to build a second production plant in the country at a cost of approximately $1 billion. Some analysts feel that Ford is doing too little too late as General Motors and Volkswagen are well entrenched in the country. Ford feels that they will be able to over come this disadvantage because their plant will be built closer to booming provinces and will grant them access to more talented workers.3 Ford is also trying to become a leader alternative fuels market. In the summer of 2004, they plan the release of the Ford Escape Hybrid, a gasoline-electric SUV. Toyota and Honda already have hybrid cars on the 1 Data taken from 2003 4th quarter earnings report (www.ford.com). 2 www.gm.com 3 www.reuters.com, Ford Motor Company news. 2
  • market and sales of those vehicles have been weak. Ford is hopeful that their model can be more successful based on the fact that it larger and more spacious than its Japanese made counterparts. Also the Escape Hybrid features a braking and gasoline electricity regeneration system. This allows the car to produce its own electricity, which increases the length of time the car can run without having to be ‘plugged in.’4 Historical Revenue and Earnings: Historical Revenue (millions) Historical EPS FY 12/03 FY 12/02 FY 12/01 FY 12/03 FY 12/02 FY 12/01 1st Quarter 40,888.0 39,857.0 42,361.0 $0.45 ($0.05) $0.56 2nd Quarter 40,670.0 42,332.0 42,314.0 $0.22 $0.29 ($0.41) 3rd Quarter 36,888.0 39,580.0 36,502.0 $0.13 ($0.18) ($0.38) 4th Quarter 46,008.0 41,580.0 41,150.0 ($0.35) ($0.07) ($2.81) Total 164,454.0 163,349.0 162,327.0 $0.45 ($0.01) ($3.04) Ford has seen earnings and revenue slowly recover as the economy has recovered over the last year. They were returned the black for the first time in 3 years in 2003 after poor years in 2002 and 2001. The poor results in those years can be attributed partially to the bad economy and the fallout after 9-11. Implementation of incentives such as zero financing helped to boost the numbers in 2002 and early 2003 as the economy struggled to get on its feet again. Earnings in 2004 are expected to double the results of 2003 as recovery continues and Ford releases several new models of vehicles. 4 http://www.fordvehicles.com/escapehybrid/ 3
  • I. Fundamental Valuation Ford Motor Company PARAMETERS 3.000 2.400 Ltg as of 2/20/04 EPS Forecasts 1.30 1.58 4.75% Model 1: 12-year forecasting horizon (T=12). Book value/share (last fye) 4.24 and a 7-year growth period. Discount Rate 10.87% Dividend Payout Ratio 69.08% Next Fsc Year end 2004 Current Fsc Mth (1 to 12) 2 Target ROE (industry avg.) 10.59% Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Long-term EPS Growth Rate (Ltg) 0.0475 0.0475 0.0475 0.0475 0.0475 Forecasted EPS 1.30 1.58 1.66 1.73 1.82 1.90 1.99 Beg. of year BV/Shr 4.240 4.642 5.130 5.642 6.178 6.740 7.328 Implied ROE 0.340 0.323 0.307 0.294 0.282 0.272 ROE (Beg. ROE, from EPS forecasts) 0.307 0.340 0.323 0.307 0.294 0.282 0.272 0.239 0.206 0.172 0.139 0.106 Abnormal ROE (ROE-r) 0.198 0.232 0.214 0.199 0.185 0.174 0.163 0.130 0.097 0.064 0.030 -0.003 growth rate for B (1-k)*(ROEt-1) 0.000 0.095 0.105 0.100 0.095 0.091 0.087 0.084 0.074 0.064 0.053 0.043 Compounded growth 1.000 1.095 1.210 1.331 1.457 1.590 1.728 1.874 2.012 2.140 2.254 2.351 growth*AROE 0.198 0.254 0.259 0.264 0.270 0.276 0.282 0.244 0.195 0.136 0.069 -0.007 required rate (r) 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109 discount rate 1.109 1.229 1.363 1.511 1.675 1.857 2.059 2.283 2.531 2.806 3.111 3.450 div. payout rate (k) 0.691 Add to P/B PV(growth*AROE) 0.18 0.21 0.19 0.17 0.16 0.15 0.14 0.11 0.08 0.05 0.02 0.00 Cum P/B 1.18 1.38 1.57 1.75 1.91 2.06 2.20 2.30 2.38 2.43 2.45 2.45 Add: Perpetuity beyond current yr (Assume this yr's AROE forever) 1.64 1.90 1.75 1.61 1.48 1.37 1.26 0.98 0.71 0.45 0.20 -0.02 Total P/B (P/B if we stop est. this period) 2.82 3.28 3.32 3.36 3.39 3.43 3.46 3.28 3.09 2.87 2.65 2.43 Implied price 12.18 14.17 14.34 14.50 14.65 14.79 14.92 14.18 13.33 12.41 11.45 10.49 Check: Beg. BV/Shr 4.24 4.64 5.13 5.64 6.18 6.74 7.33 7.94 8.53 9.07 9.56 9.97 Implied EPS 1.30 1.58 1.66 1.73 1.82 1.90 1.99 1.90 1.75 1.56 1.33 1.06 Implied EPS growth 0.215 0.048 0.048 0.048 0.048 0.047 -0.048 -0.076 -0.108 -0.150 -0.206 Inputs: 1. EPS Forecasts and long-term growth rate (LTG) are from Multex Investor (2/20/04). 2. Book value per share derived from 12/31/03 balance sheet. Total equity= 8084.0 million, common stock outstanding= 1908 million implying BVPS= 8084.0M/1908M= $4.23. 3. Discount rate: Used 20 year t-bond rate of 4.93% for risk-free rate, an expected return on the market of 9.5%, and Ford Motor Company’s beta estimated as 1.3 (from Multex) yielding a CAPM discount rate of 10.87% =0.0493+1.3(0.095-0.0493). 4. Dividend payout ratio is the trailing 12 months as reported by Multex. 5. Next fiscal year-end is 12/2004. 6. Current fiscal month is 2 (February). 7. Target ROE= 10.59%, the lagging Automobile Manufacture industry ROE reported by Multex. Output and Sensitivity Analysis: 1. Based on these parameters, a 12-year forecasting horizon and a 7-year growth period, the EBO valuation is $10.49. 2. Changing the discount rate to 7.80% (-3.00), the EBO is $14.44, implying that we can expect a return of 7.8% if the expectations in this model are upheld. 3. Changing the growth rate to 7.00% (+2.25), the EBO valuation is $11.04. 4. Changing the industry ROE 14.0% (+2.41), the EBO valuation is $11.76. 4
  • II. Relative Valuation Mean FY2 Earnings Estimate Forward Mean LT PEG P/B ROE Value Ticker Name Mkt Cap Current Price (next fiscal year) P/E Growth Rate (MRQ) 5 yr ave Ratio P/S 1 DCX  Daimlerchrysler Ag 48,130 45.27 3.36 13.47 5.55% 2.43 0.91 10.04% 0.09 0.22 2 GM General Motors Corp. 27,746 48.51 4.67 10.39 6.00% 1.73 2.00 16.59% 0.12 0.11 3 HMC Honda Motor Co., Ltd. 42,504 21.60 2.11 10.24 16.10% 0.64 1.69 14.99% 0.11 0.56 4 TM Toyota Motor Corp. 125,141 69.06 4.66 14.82 11.00% 1.35 1.44 8.36% 0.17 0.68 F Ford Motor Corporation 25,664 14.45 1.58 9.15 4.75% 1.93 2.35 4.61% 0.51 0.16 Implied Price based on: P/E PEG P/B Value P/S 1 DCX  Daimlerchrysler Ag $21.29 $18.22 $5.60 $2.57 $19.87 2 GM General Motors Corp. $16.41 $12.99 $12.30 $3.42 $9.93 3 HMC Honda Motor Co., Ltd. $16.17 $4.77 $10.39 $3.20 $50.58 4 TM Toyota Motor Corp. $23.42 $10.11 $8.85 $4.88 $61.41 High $23.42 $18.22 $12.30 $4.88 $61.41 Low $16.17 $4.77 $5.60 $2.57 $9.93 Median $18.85 $11.55 $9.62 $3.31 $35.22 Indicator Interpretation P/E Bullish—Ford’s forward P/E is lower than its competitors. This indicates that Ford is (a) undervalued, (b) lower risk, or (c) is expected to have slower long- term growth. PEG (P/E/G) Bearish/Neutral—Ford’s PEG is the forth highest out of the five competitors —second out of the big three US automakers, suggesting once the price is adjusted for growth the stock is slightly overvalued or higher risk. P/B Bearish—Ford’s P/B is substantially higher than its competitors. Value (P/B/ROE) Bearish—Ford’s Value ratio is substantially higher than its competitors. The market must expect a higher ROE from Ford in the future when compared to competition. P/S Bullish/Neutral—Ford’s P/S is the second lowest of all the firms, and second out of the big three US automakers. This indicates that the stock is cheap. Summary There is some contradiction among the relative indicators. One possible explanation for this include the fact that two of the four competitors are companies with high expected long-term growth, while the other two, as well as Ford, are larger established companies with lower expected long-term growth. Another factor is that the industry is still recovering from the fallout of the poor economy. As a result, Ford’s expected short-term growth (see EPS estimates for 2004 & 2005) is incredibly high when compared to the expected long-term growth rate. Overall the Relative Valuation is slightly bearish, with forward indicators leaning towards bullish and the historical indicators leaning bearish. 5
  • III. Technical Analysis Indicator Interpretation Bollinger Bands Neutral—the price is not approaching either band. Stochastics Bearish—%K=36.24 %D=52.10%, %K is below %D but gap is beginning to close. Moving Neutral—The price is below 25-day MA but above 100-day MA. The 25-day MA is above 100- Averages day MA but the gap is decreasing. MACD Bullish/Bearish—The MACD is positive at .8, but the signal line is 1.18, which indicates that the gap is closing. Regression Bearish—The trend line is downward sloping and the price is greater than the trend line, both bearish indicators. Momentum Bullish—Price is greater than it was 100 days ago. In addition, the slope of the line is positive. 6
  • IV. Earnings Analysis Earnings Surprises Dec. 03: Sept. 03: June 03: Mar. 03: Dec. 02: (Last qtr) (2 qtrs prior) (3 qtrs prior) (4 qtrs prior) (5 qtrs prior) Estimate 0.27 -0.12 0.16 0.21 0.07 Actual 0.31 0.15 0.22 0.45 0.08 Difference +0.04 +0.27 +0.06 +0.24 +0.01 Mean Earnings Estimates Mar 04: June 04: Dec. 2004: Dec. 2005: LT Growth This quarter Next Quarter This Fiscal Yr. Next Fiscal Rate Yr. Earnings .45 .36 1.29 1.59 4.75% # Estimates 17 15 18 17 4 Earnings Per Share Estimates Revisions Summary Last Week Last 4 Weeks Revised Up Revised Revised Up Revised Down Down Quarter ending Mar. 04 0 0 2 6 Quarter ending June 04 0 0 6 1 Year ending Dec. 04 0 0 7 1 Year ending Dec. 05 0 0 3 1 Ford has beat analysts’ estimates in each of the last five quarter. Analysts have been surprised by Ford’s revenue or their productivity margins. These results are a good sign for Ford’s future earnings potential. Analysts estimate that Ford will be able to increase earnings in this quarter with a slight pullback in the second quarter. For the year, analysts estimate that Ford will increase earnings in 2004 to $1.29 a share, an increase of 150% over 2003. In 2005, earnings are expected to increase an additional 23% over 2004. There have been no analyst revisions in last week. In the last four weeks there have 6 down downgrades and 2 upgrades for the first quarter of 2004, which indicates that the estimate of $0.45 could be overly optimistic. As for the second quarter 2004, full-year 2004, and full-year 2005 the number of up revisions greatly outnumber the down revisions. While there is some uncertainty about the EPS in the first quarter, the outlook for the remainder of 2004 and 2005 is bullish. 7
  • V. Analysts’ Recommendations Current 1 Month Ago 2 Months Ago 3 Months Ago Strong Buy 1 1 1 2 Buy 1 1 1 2 Hold 10 9 9 9 Underperform 2 3 3 2 Sell 1 1 1 2 No Opinion 1 1 1 1 Mean Rating 3.07 3.13 3.13 3.00 Analysts’ recommendations about Ford have been relatively stable over the last 3 months. Their mean rating has dropped by .06 in the last month resulting from a change to hold from underperform.. The lack of activity in analysts’ recommendations reinforces the general consensus of a hold recommendation. 8
  • VI. Institutional Ownership # Holders % Beg. Holders # Shares (000) % Shares Shares Outstanding 1,909,253 100.00% # Institutions/Total Shares 505 85.45% 628,144.23 32.90% # New Buyers 34 5.75% # Closed Positions 44 7.45% # Buyers/3 Mo. Shares Purch. 195 32.99% 50,767.11 2.66% # Sellers/3 Mo. Shares Sold 281 47.55% 49,611.28 2.60% Beg. Total Inst. Positions 591 100.00% 626,988.40 32.84% # Net Buyers/3 Mo. Net Chg. -86 -14.55% 1,156 0.06% Approximately 15% of institutional investors either closed out or reduced their holdings over the last three months. This is a relatively large number and is a bearish indicator. However, all of the shares sold plus an additional 1,156,000 were purchased by institutional buyers. This data suggests that the many institutional investors feel the stock is set to move either up or down. The large number of sellers suggests that the stock price might be headed for downturn. On the other hand, having buyer cover all of the sales plus some indicate that those investors feel the stock is set for a bullish run. 9