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A quick look at Ford (F)



March 16, 2014 – Comments (2) | RELATED TICKERS: 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.

2 Comments – Post Your Own

#1) On March 17, 2014 at 12:29 PM, constructive (99.97) wrote:

Both Ford and GM would be great investments if it were not for their European operations. The amount of money they have lost in Europe over the past decade is unreal.

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#2) On March 17, 2014 at 4:30 PM, ALLWIN (< 20) wrote:

Any suggestions where you ae going to look?


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