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Why isn't Ford Stock Higher?

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May 02, 2011 – Comments (3) | RELATED TICKERS: F

This is a response to a question on the Stock Advisor Ford board that I think is relevant to this board as well. I don't claim to have touched all the bases, but here it is:

Given all of this - why isn't Ford valued higher? -- MrsOCallahan

Great question. Since the market doesn't speak with one voice, I think the best we can do is look at issues of concern:

* Higher oil prices reduce consumer available cash for buying and introduce a fear of possible recession. Its important to note that the current industry sales level is still quite weak. These issues, in my opinion, is the big hitter...especially the part about the consumer and their cash. A lot of people are hurting...and unemployment is very high, even though it may not seem like it on Fool boards where folks celebrate their multi-baggers (including me)....just sayin'....

* On a related note, there is concern that the end of Fed QE2 could introduce weakness in the economy, leading to QE3...which means more massive indebtedness and possible negative effects on the dollar.

* Higher commodity prices (due both to scarcity and dollar issues) put pressure on profit margins.

* Ford's debt is still very high compared to competitors, despite progress they have made.

* The market is an oddball. It often seems to be focused on the short term instead of the long term opportunities, is typically risk averse...and otherwise seems frequently irrational.

* Ford US retail market share has declined somewhat in recent months as they pursue maximization of profit and retention of residual values in lieu of market share. Maybe some folks think Ford may not be able to deliver superior results in the face of recovering competition.

* Ford has had a couple expensive product recalls in progress or pending. Although this is not unusual in the industry, it has a cost in consumer perception and on the bottom line.

* Concern as to whether Ford can "keep the hits coming". Focus has had a problematic launch and there may be concern regarding the appeal of some upcoming products such as the C-Max and Escape. (Yeah, I know some folks here love the Escape/Kuga, but actual market research results are mixed. It should be successful, but is not going to blow away the competition (such as RAV4 and CRV). It'll continue to be a competitive segment.

Now personally, I believe the concerns are not as big a deal as some article writers and talking heads indicate (except for reduced cash in the pocket of the consumer). I figure the price range you indicated in your post ($20-22) is not unreasonable and I wouldn't be at all surprised to see it in that range within the next 10 months or so. (I figure ongoing debt reduction, more successful products and great earnings should do the trick by the 4Q earnings report....but I've been wrong before on timing!)

I also have a number of Ford Jan12 17.5 calls....so that timing would work out darn nicely for me (assuming a pre-earnings run-up in time for options expiration). LOL

I think the word here should be patience, just like we need for so many investments. Big upward moves are nice, but they don't come on command. :) I just plan to keep an eye on the business and the economy...and sit back to wait for the higher stock prices that I think are inevitable...assuming we don't have a near term oil shock or some other massive unpleasantness.

Rob
RB Home Fool

3 Comments – Post Your Own

#1) On May 02, 2011 at 1:23 PM, ElCid16 (93.43) wrote:

Let's look at history for a possible idea of why Ford isn't trading higher...

A P/E of 10 for Ford is pretty normal.  Over the past 50 or so years, Ford has traded between a 5-15 P/E pretty consistently, while the stock price has seen long-term increases and decreases.  There have been a few spikes in P/E (or negative P/Es) that have resulted in short term price movements, but the idea that P/E doesn't correlate with stock movements holds pretty true.

P/S, historically, is a much better indicator of where F is heading.  From the late 1960s through the early 1980s Ford's share price slowly and steadily declined from roughly 3-4 dollars down to <2 dollars (split adjusted, obviously).  During this timeframe, the P/S gradually decreased from above 0.60 all the way down to less than 0.10 - regardless of a constant increase in revenues during that timeframe.  Simply put, Ford had to grow its way into its valuation.

This P/S decrease from 0.60 in the late 60s all the way down to 0.05 in 1981 began an incredible bull run, which lasted all the way to its stock peak in 1999.  In 1999, the stock again saw its P/S rise to unsustainable levels, roughly 0.50.  This began yet another long-term turn downward, all the way to its 2009 low and a sub 0.05 P/S.

Instead of gradually growing back into a normal P/S valuation, the stock quickly rebounded back to a mid teens stock price - and a current P/S of 0.46.  If the stock were to jump another $5 or so, the P/S would be back up to its 50 year high levels of ~0.60 (assuming they don't increase YOY revenue by 50% within the next year or so), which could lead into a long-term stock stagnation (or decline) while it gradually grows its revenues up over the next 5-15 years.  

Simply speaking, the stock is valued very highly based on a metric (P/S) that has historically been a good story teller of where the share price is going.  There is always a chance that the market will ignore the high valuation in P/S and this time could actually be different - but I like to side with history.

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#2) On May 02, 2011 at 5:11 PM, Varchild2008 (83.58) wrote:

Except Ford's P/E is a lot closer to 8 than it is 10.

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#3) On May 02, 2011 at 6:31 PM, ElCid16 (93.43) wrote:

I just averaged all of Ford's fiscal year-ending P/E's since 1963:

7.5

And then averaged all of Ford's fiscal year-ending P/S's since 1963:

0.25

Price appreciation from here just puts it further into its historic "unsustainable" range. 

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