A quick look at Ford (F)
Ford is trading at a P/E of 8 right now (about half the S&P 500), and I've seen a few articles highlighting the potential value in the cheap shares. I did a little digging to see if it was something I might be interested in.
The reason the P/E is so cheap right now is because net income came in around $3B dollars for the latest quarter, roughly $2.5B higher than operating income at $500M. For the year, operating income came in around $5.4B, yet net income came in at around $7.15B. Without this financial benefit, net income would have ticked in a bit lower and the P/E would have been a bit higher. Using operating income in the P/E ratio yield a value closer to 11. If you priced the company based on 2013 Free Cash Flow, which was about $3.9B, the P/FCF is about 16. Not quite as cheap, by these metrics. (And you can't really make the argument that free cash flow is low due to heavy reinvestment - 2013 CapEx barely matched 2013's reported depreciation.)
In my last blog post, I talked about the Returns on Assets of the companies in the S&P 500 that have had the longest tenure in the index. Of those "longest lasting" companies, the Returns on Assets ranged from 3-10% for 80% of the companies. (A handful of the best performing companies (MMM, KO, KMB, MO, CL) all had ROA values above 10%.)
Using operating profit as a metric of returns, Ford's ROA over the past 4 years has been: 4.5%, 4.1%, 3.1%, 2.7%. Returns over the past 4 years have been trending toward the very bottom of the 3-10% range listed above, and this isn't even based on net income - it's based on operating income.
The dividend now checks in at a relatively nice 3.3% yield, which isn't too shabby. But the annual dividend cash outlay is $2B per year. That translates to a payout ratio over 50% based on Free Cash Flow. This leaves less flexibility in future financing decisions - something Ford might need, considering they've ammassed $115B in debt.
Personally, I'm gonna pass on Ford right now. Until operating metrics can break the downtrend, and Ford can show that the heavy investments over the past 3 years are starting to pay off, I'll look elsewhere.