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  • 1. Ford Motor Co. (F) Jared Garves Date: November 27, 2006 Consensus Estimate 9/06A 12/06E 12/07E Sector: Consumer Goods EPS -.87 -1.23 -.10 Industry: Auto Manufacturer P/E N/A N/A N/A Current Price: $8.16 Long Term Growth Rate: 5.96% 52 Wk Price Range: $6.06-$9.48 Ratio Analysis Co. Indus. Sector SP500 Ave. Daily Vol: 17,400,000 P/E (TTM) N/A 12.50 19.11 20.68 Beta: 1.83 P/S (TTM) .10 .37 1.40 2.96 Market Cap ($million): $14,800 P/B (MRQ) 1.76 1.79 3.63 3.93 Shares Out (million): 1,800 ROA (TTM) -2.42 2.23 7.51 8.29 Inst. Hold %: 64.5% EBO Valuation $0.66 Div Yld: 0.00% Recommendation: Hold Total Debt/Equity: 16.85 Stop-loss Price: $6.00 Member S&P 500? Yes Price 6-mo prob 12-mo prob Target Price $10.00 46% 57% Investment Thesis Summary o There are currently a range of problems happening at Ford. These problems consist Fundamental Valuation: of mass overproduction, high and protected Bearish- Using a discount rate of 13.45%, EBO labor costs, poor strategic direction in a valuation equals $0.66, which is 92% lower than changing environment, and a weak and the current price. inflexible management. In return, Ford lost Relative Valuation: $4 billion dollars in its automotive segment Neutral- P/E and PEG ratios are neutral in 2005, and is headed in the same direction because of negative earnings. P/B and P/S ratios this year. are slightly bullish. Value ratio is bearish. Technical Analysis: o Ford is able to develop better resources Bullish- Two neutral indicators, one bearish and through investments and innovations. They three bullish signs indicate the analysis to be have recently supplied $2 billion into a bullish. manufacturing complex in Michigan. They Earnings Analysis: have also just recently launched their first Bearish- With negative earning surprises over the hybrid SUV, the Ford Escape. Since 1996, past three quarters and no upward revisions, Ford Motors has sold more than 1.6 million earnings analysis proves to be a bearish indicator. vehicles that run on ethanol. The market has Analyst Recommendations: incorporated this into the stock price. Bearish- Mean rating of 3.76 represents an underperform stock. There are zero o Ford has recently hired new CEO, Alan recommendations to buy or outperform. Mulally, the former CEO of Boeing. While Institutional Ownership: at Boeing, Mulally faced similar problems to Bearish- Over the past three months the number those he is now facing at Ford. He was also of institutional sellers exceeded the number of able to effectively deal with the troubles that buyers by 4.28% as well as the institutions losing Boeing encountered after September 11, nearly 60 million shares. 2001. The market has incorporated this into Piotroski Analysis: its stock price. Bearish- Ford Motors is in the 3rd quintile with a P/B ratio of 1.76 and a Piotroski score of three. o With an EBO valuation of $0.66 and all analysis except the technical being bullish, overall analysis point towards a bearish 1
  • 2. Company Summary Ford Motor Company (F) entered into the world of business on June 16, 1903, by a man named Henry Ford. Ford, along with eleven business associates, signed the company's articles of incorporation. With only $28,000 in cash, the capitalists gave birth in Detroit, Michigan to what today is known as one of the world’s largest corporations. Ford is currently part of the Consumer Goods sector and is traded on the New York Stock Exchange. Ford’s primary service is the production of cars and trucks. Ford has a family of brands that include: Lincoln, Mercury, Mazda, Jaguar, Land Rover, Aston Martin, and Volvo. 1 Ford operates in two segments: Automotive and Financial Services. The Automotive segment includes vehicle operation of The Americas, Ford Europe and Premier Automotive Group, and Ford Asia Pacific and Africa/Mazda. The Financial Services segment includes the operations of Ford Motor Credit Company, which is engaged in vehicle-related financing for all Ford customers. All of Ford's cars, trucks and parts are marketed through retail dealers in North America, and through distributors and dealers outside of North America.2 Ford is currently the world's largest producer of trucks and the second largest producer of cars. The company has vehicle operations in more than 30 countries, and employs over 300,000 men and women in its factories, laboratories and offices around the world. There are also 60,000 companies worldwide that supply Ford with its goods and services. Ford sells cars and trucks to its dealers for resale to its customers, including daily rental car companies, commercial fleet customers and leasing companies and governments. In addition to producing and selling cars and trucks, Ford also provides retail customers with a variety of services and products through its dealer network, mainly in the areas of maintenance, repair and vehicle service warranties.3 Ford is currently run by Executive Chairman Bill Ford, President and Chief Executive Officer Alan Mulally, President of The Americas Mark Fields and Chief Financial Officer Don Leclair, and also has thirteen members on its board of directors. In 2005, Ford Motors had total sales of $177.10 billion and sold 6,818,000 vehicles worldwide. Ford sold 3,799,000 vehicles in The Americas and nearly 2,500,000 vehicles in Europe in 2005. Total revenue for Ford’s Automotive segment was nearly $153.5 billion, while their Financial Services segment had total revenue of $23.6 billion in 2005. Competition and Strategy Ford experienced profits and growth around the world in 2005, with a major exception in North America, where short and long term challenges slowed down their process. One reason for Ford’s struggles is due to the major restructuring process that is happening throughout the company. This is due to its competitors and their ability to maintain efficiency in production and profitability. Ford’s top four competitors in the United States are Toyota Motor Corporation, Honda Motor Corporation, DaimlerChrysler and General Motors.4 In order to keep up with the industry leaders in America, Toyota has had to innovate ways to be cost ________________________ 1. 2. 3. 4. 2
  • 3. competitive and at the same time, accommodate consumer needs. In order to do this, Toyota developed both the differentiation and low cost strategies. Toyota can be seen as the pioneer of the hybrid market because they were the first company to introduce the hybrid and are also able to adapt to the changing market needs. Toyota’s profits rose 0.8 percent to 1.17 trillion yen ($11billion), while sales were 7.3 percent higher at 18.55 trillion yen when the company invested in factories in the US and China in 2005. They are a leader in the industry with a market capitalization of $194.5 billion. 5 Honda Motor Corporation’s business-level strategy is cost leadership. The company appeals to a broad market while maintaining relatively low costs. Honda has established specialized production systems, a balance of engineering and marketing requirements, cost efficiency, and supplier reliability. Honda also seeks continual innovation, and has been successful in the past with unique distribution channels through retailing. Honda began its push for the hybrid car and gained early mover advantage in that market. Honda is currently number two in the industry in terms of market capitalization at $69.2 billion.6 DaimlerChrysler employs both low cost leadership and focused differentiation strategies. While luxury automobiles are their main focus, they have also begun producing low cost vehicles with multiple options for each model. This allows DaimlerChrysler to tap in to two markets simultaneously and maintain profits. DaimlerChrysler has a market capitalization of $59.0 billion.7 General Motors is most comparable to Ford Motors. They as well have had a difficult 2005 year where they sold 9.17 million cars and trucks; however the company had a total loss of $2.4 billion. General Motors is changing their business model to deal with the larger phenomenon of globalization and the competition it has brought to the U.S. economy, along with developing fuel-efficient vehicles and that are in the demand of the consumers. General Motors is most comparable in terms of market capitalization with a capitalization of $16.8 billion. 8 Ford has had a successful past with innovation such as the creation of the assembly line. This enabled workers to stand in the same spot and repeat the same task over and over. This allowed Ford to create vehicles at a cheaper cost and also proved to be much more efficient in production. Ford continues with the assemble line today, which has led to its achievement as a leading auto manufacturer in the automotive industry. With Ford’s commitment to innovation, they spent nearly $6 billion in 2005 on U.S. research and development. However, components in the general environment have changed over time, and Ford has neglected to respond to the changes as they happened. Instead, the company has pursued on in a produce-to- capacity strategy that has inevitably led to overproduction and a separation of market demands and the products the company has produced. Domestically, the market reached maturity, and foreign companies entered with lower-cost and fuel-efficient vehicles. These foreign competitors have absorbed market share from the domestic companies such as Ford. In return Ford lost $2.5 billion in its United States market and $3.9 billion overall in its automotive segment in 2005. The company’s financial segment had a profit of $5.9 billion which in return led Ford to a net profit of $2 billion. A major strategic move was brought on last September when Ford hired Alan Mulally, the former CEO of Boeing, to take over reigns of the company. Ford is also concentrated on improving their core automotive business. They continue to divest in different companies, lower costs and refocus financial operations. They have begun to innovate in order to meet the demands of their customers. In 2004 they launched their first hybrid vehicle, the Ford Escape, in hopes creating a more economical vehicle. They are also shutting down non-profitable plants throughout the country such as their Atlanta, Georgia plant where the plant is only capable of producing the Ford Focus, which is a vehicle that is no longer in demand. Another strength Ford possesses is its ability to develop better resources through the company. Ford has just invested $2 billion into a Michigan plant where they implemented cutting-edge manufacturing and environmental features that make the manufacturing complex a ________________________ 5. 6. 7. 8. 3
  • 4. healthy and efficient, world-class facility. Ford’s operations in Europe, Asia and South America are all profitable, where they have sold nearly $70 billion worth of vehicles. Though they have struggled recently in the United States, Ford is committed to restructuring their company and once again, become one of the largest producers of cars and trucks in the country. Historical Revenue and Earnings: Historical Revenue ($millions) Historical Earnings ($) FY 12/06 FY 12/05 FY 12/04 FY 12/06 FY 12/05 FY 12/04 1st Quarter 40,801.00 44,895.00 44,723.00 -.76 .48 1.07 2nd Quarter 41,894.00 45,166.00 42,837.00 -.17 .66 .64 3rd Quarter 37,110.00 40,510.00 39,121.00 -2.79 -.31 .15 4th Quarter N/A 176,896.00 172,316.00 N/A .78 1.66 Total 119,805.00 307,467.00 299,033.00 -3.72 1.61 3.52 Over the past three years, Ford has shown overall increasing revenue. This can be attributed to selling nearly 100,000 more vehicles in 2005 when compared to 2004. However, Ford’s earnings have decreased over the past three years, and currently show no signs of increasing. This is because they are currently producing an excess of vehicles that are no longer being purchased by consumers. Ford has indicated that it will cut car and truck output by 168,000 vehicles in 2007, which is down 21 percent from this past year. This should cause earnings to increase in 2007. Overall, final earnings in 2005 underperformed 2004 earnings by 54%, while revenue was up nearly 3%. 4
  • 5. I. Fundamental Valuation Ford Motors PARAMETERS FY1 FY2 Ltg EPS Forecasts -1.23 -0.10 5.96% Model 1: 12-year forecasting horizon (T=12). Book value/share (last fye) 7.21 and a 7-year growth period. Discount Rate 13.45% Dividend Payout Ratio 2.35% Next Fsc Year end 2006 Current Fsc Mth (1 to 12) 11 Target ROE (industry avg.) 5.91% Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Long-term EPS Growth Rate (Ltg) 0.0596 0.0596 0.0596 0.0596 0.0596 Forecasted EPS -1.23 -0.10 -0.11 -0.11 -0.12 -0.13 -0.13 Beg. of year BV/Shr 7.210 6.009 5.911 5.808 5.698 5.582 5.459 Implied ROE -0.017 -0.018 -0.019 -0.021 -0.023 -0.024 ROE (Beg. ROE, from EPS forecasts) -0.171 -0.017 -0.018 -0.019 -0.021 -0.023 -0.024 -0.008 0.009 0.026 0.042 0.059 Abnormal ROE (ROE-r) -0.305 -0.151 -0.152 -0.154 -0.155 -0.157 -0.159 -0.142 -0.126 -0.109 -0.092 -0.075 growth rate for B (1-k)*(ROEt-1) 0.000 -0.167 -0.016 -0.018 -0.019 -0.020 -0.022 -0.024 -0.008 0.009 0.025 0.041 Compounded growth 1.000 0.833 0.820 0.806 0.790 0.774 0.757 0.739 0.733 0.740 0.758 0.790 growth*AROE -0.305 -0.126 -0.125 -0.124 -0.123 -0.122 -0.120 -0.105 -0.092 -0.081 -0.070 -0.060 required rate (r) 0.135 0.135 0.135 0.135 0.135 0.135 0.135 0.135 0.135 0.135 0.135 0.135 0.135 discount rate 1.135 1.287 1.460 1.657 1.879 2.132 2.419 2.744 3.113 3.532 4.007 4.546 div. payout rate (k) 0.024 Add to P/B PV(growth*AROE) -0.27 -0.10 -0.09 -0.07 -0.07 -0.06 -0.05 -0.04 -0.03 -0.02 -0.02 -0.01 Cum P/B 0.73 0.63 0.55 0.47 0.41 0.35 0.30 0.26 0.23 0.21 0.19 0.18 Add: Perpetuity beyond current yr (Assume this yr's AROE forever) -2.00 -0.73 -0.64 -0.56 -0.49 -0.42 -0.37 -0.28 -0.22 -0.17 -0.13 -0.10 Total P/B (P/B if we stop est. this period) -1.27 -0.09 -0.09 -0.08 -0.08 -0.07 -0.07 -0.02 0.01 0.04 0.06 0.08 Implied price -10.27 -0.76 -0.72 -0.67 -0.63 -0.60 -0.56 -0.18 0.10 0.33 0.51 0.66 Check: Beg. BV/Shr 7.21 6.01 5.91 5.81 5.70 5.58 5.46 5.33 5.29 5.33 5.47 5.69 Implied EPS -1.23 -0.10 -0.11 -0.11 -0.12 -0.13 -0.13 -0.04 0.05 0.14 0.23 0.34 Implied EPS growth -0.919 0.060 0.060 0.060 0.060 0.060 -0.691 -2.147 1.891 0.692 0.452 Inputs: 1. EPS Forecasts of -$1.23 per share for 2006 and -$0.10 per share for 2007, as well as a long term growth rate of 5.96%, were obtained from on November 27, 2006. 2. Book value per share of $7.21 from the 2005 fiscal year was provided at on November 27, 2006. 3. The discount rate was derived from the CAPM using a risk free rate of 4.74% based on the most recent return for 20 year treasury bonds from release H.15, an average market return of 9.5% was used, and a Beta of 1.83. This resulted in a discount rate of 13.45%. 4. Ford did not have a dividend payout ratio for there most recent quarter. Therefore I used their previous ratio of 5%. I then divided that by 6% and multiplied Ford’s total assets per share which equals 141.59. In return, the overall dividend payout ratio is equal to 2.35%. 5. Next fiscal year-end is 2006. 6. Current fiscal month is 11 (November). 7. Target ROE is 5.91% for the Auto Manufacturing industry, obtained from on November 27, 2006. Output and Sensitivity Analysis: 1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO valuation is $0.66. 2. Changing the discount rate to 10% increases the EBO valuation to a price of $1.25. To get the current price of $8.16, the discount rate must equal 3.04%. 3. Changing the growth rate to 8.5% lowers the implied price to $0.65. 4. Changing the industry ROE to the company ROE of 0.77% yields an EBO valuation of $0.04. 5
  • 6. II. Relative Valuation Mean FY2 Earnings Estimate Forward Mean LT PEG P/B ROE Value Name Mkt Cap Current Price (next fiscal year) P/E Growth Rate (MRQ) 5 yr ave Ratio P/S DaimlerChrysler AG 59.23B 57.91 4.22 13.72 4.11% 3.34 1.26 4.92% 0.26 0.30 General Motors Co. 17.17B 35.53 4.37 8.13 4.48% 1.81 1.79 -1.75% -1.02 0.09 Caterpillar Inc. 40.31B 61.97 5.61 11.05 15.56% 0.71 4.53 23.99% 0.19 1.02 United Technologies Inc. 65.05B 64.84 4.14 15.66 11.30% 1.39 3.50 22.42% 0.16 1.43 Ford Motors Co. 15.41B 8.16 -0.10 NA 5.96% NA 1.76 0.77% 2.29 0.10 Implied Price based on: P/E PEG P/B Value P/S DaimlerChrysler AG NA NA $5.84 $0.91 $24.48 General Motors Co. NA NA $8.30 -$3.65 $7.34 Caterpillar Inc. NA NA $21.00 $0.67 $83.23 United Technologies Inc. NA NA $16.23 $0.56 $116.69 High NA NA $21.00 $0.91 $116.69 Low NA NA $5.84 -$3.65 $7.34 Median NA NA $12.26 $0.62 $53.86 Indicator Interpretation P/E Neutral- Ford has a negative P/E ratio and therefore cannot be compared to its competitors. PEG (P/E/G) Neutral- Ford has a negative PEG ratio and therefore cannot be compared to its competitors. P/B Slightly Bullish- P/B ratio is lower than three out of its four competitors. The current price may be undervalued or it could mean it is a riskier stock. Value (P/B/ROE) Bearish- Ford’s value ratio is much higher than its competitors. This means the market must expect a higher ROE from the company in the future when compared to its competition. P/S Slightly Bullish- Valuation based on price to sales ratio suggests the stock is fairly valued. This is an indication that the stock is relatively cheap. Summary Neutral- With two slightly bullish indicators, and one bearish indicator, overall valuation of Ford is neutral. However, it is hard to compare Ford to its competitors because of its negative P/E and PEG ratios. 6
  • 7. III. Technical Analysis Chart 1: Chart 2: Chart 3: -All three charts compiled from 7
  • 8. Indicator Interpretation Bollinger Bands Neutral- Over the past two months the upper and lower bands have moved closer together, suggesting there is currently less volatility than before. The current price of $8.16 is level with the moving average. Stochastics Bearish- %K is around 25% which is a neutral indication because the stock is not overbought or oversold. %D is higher that %K which is a bearish sign. Moving Averages Neutral- The direction of the 25 and 50 day moving averages have been on the rise since August, which is a bullish signal. However, the current price of $8.16 is below the moving average, which is a bearish signal. MACD Bullish- The MACD line is currently above zero which is a bullish signal. Also, the signal line is lower than the MACD line, another bullish sign. Regression Bullish- The linear regression line has sloped upward over the past 25 days, which is a bullish indicator. Also, the current price is below the trend line, which means the price is poised for a rise towards the regression line, a bullish sign. PriceROC Bullish- Over the past 100 days, the price has gained momentum, which is a bullish signal. The current point is above zero, another bullish indicator. 8
  • 9. IV. Earnings Analysis Earnings Surprises Sept. 2006 June 2006 March 2006 Dec. 2005 Sept. 2005 (Last qtr) (2 qtrs prior) (3 qtrs prior) (4 qtrs prior) (5 qtrs prior) Estimate -0.62 0.14 0.27 0.01 -0.10 Actual -0.62 -0.03 0.24 0.26 -0.10 Difference 0.00 -0.17 -0.03 0.26 0.00 Mean Earnings Estimates Dec. 2006 March 2007 Dec. 2006 Dec. 2007 LT Growth This Quarter Next Quarter This Fiscal Next Fiscal Rate Year Year Earnings -0.87 -0.03 -1.23 -.10 5.96 # Estimates 16 2 17 2 4 Earnings Per Share Estimates Revisions Summary Last Week Last 4 Weeks Revised Up Revised Revised Up Revised Down Down Quarter ending 12/06 0 0 1 0 Quarter ending 3/07 0 0 0 0 Year ending 12/06 0 0 3 0 Year ending 12/07 0 0 1 0 Ford has shown inconsistent earnings when compared to its estimates. During March and June of 2006, the company showed negative earning surprises. There were positive surprises one year ago, however this coming quarter; earnings are expected to be negative. If the company’s earnings meet analyst expectations over the final quarter, Ford will earn -$1.23 per share for this year. This is a bearish indication for the stock. There have been no revisions over the past week and only three revisions upward in the past month for this year. Overall, earning analysis proves to be a bearish indicator. 9
  • 10. V. Analysts’ Recommendations Current 1 Month Ago 2 Months Ago 1 Year Ago Buy 0 0 0 1 Outperform 0 0 1 2 Hold 9 9 6 9 Underperform 3 3 5 3 Sell 5 4 3 4 No Opinion 0 0 0 0 Mean Rating 3.76 3.69 3.67 3.37 The current mean rating for Ford is 3.76 on the scale of 1 = buying; and 5 = selling. Overall, analysts believe this stock will underperform. This is a bearish indication. Analyst recommendations have been fairly stable over the past two months which is a neutral indication. There have been no recent buy or outperform recommendations in the past month, which is a bearish signal. Overall, with two bearish indicators and one neutral indicator, analyst recommendations are a bearish sign for Ford. 10
  • 11. VI. Institutional Ownership # of Holders % Beg. Holders Shares % Shares Shares Outstanding 2,248,446,815 100.00% Total Positions 425 95.72% 1,214,161,280 54.00% New Positions 58 13.06% 26,804,716 1.19% Soldout Positions 52 11.71% -21,892,910 -0.97% Buyers 196 44.14% 98,162,816 4.37% Sellers 215 48.42% -157,639,424 -7.01% Beg. Total Inst. Positions 444 100.00% 1,273,637,888 56.65% # Net Buyers/3 Mo. Net Chg. -19 -4.28% -59,476,608 0.00% The number of institutional sellers exceeded the number of buyers over the past three months, resulting in a 4.28% drop in the number of institutions owning Ford. This drop in the number of institutional owners is a bearish sign for the stock. The number of shares owned by institutions saw a decrease by nearly 60 million shares, meaning that existing owners are decreasing their position in the stock. In return, this is another bearish signal. There are two bearish indicators in the valuation of institutional ownership, which therefore means an overall bearish signal. 11
  • 12. VII. Piotroski Analysis A. P/B ratio and quintile (1=growth, high P/B; 5=value, low P/B): 1.76 P/B ratio, 3rd quintile B. Piotroski Score: 3 Piotroski Item Variable needed to compute Value Points 1. Positive net income TTM net income (1,575,000) 0 2. Positive cash flow TTM cash flow 17,791,000 1 3. Earnings Quality 1 4. Decreasing Debt Debt/assets most recent ann figure 20.80 0 Debt/assets previous ann figure 18.24 5. Increasing working Current ratio most recent ann 1.18 1 capital figure Current ratio previous ann figure 1.06 6. Improving Productivity Asset turnover most recent ann 0.60 0 figure Asset turnover previous ann figure 0.60 7. Growing Profitability ROA most recent ann figure 0.72% 0 ROA previous ann figure 1.15% 8. Issuing Stock Shares outstanding most recent ann 1,846 0 Shares outstanding previous ann 1,830 9. Competitive Position Gross margin most recent ann 18.20% 0 Gross margin previous ann 20.90% Total 3 12