Frankly, there are a lot of “cheap” stocks in the market today, given the S&P 500 is trading at 10(x) earnings for an expected 10% earnings growth rate in 2012, but what caught our eye on Ford was the cash-flow valuation, even though forward earnings estimates have been reduced.
The “forward 4-quarter” eps estimate for F is currently $1.56 per share, down from $2.19 just five quarters ago, so you can understand why the stock is seemingly under pressure, however during the same period, Ford’s cash-flow and free-cash-flow generation has soared, which in my opinion has left the shares very reasonably-valued in a tough market.
Ford automotive cash-flow has increased from $5.4 to $8.3 bl in the last five quarters as automotive free-cash-flow has improved from $1.4 to $4.2 bl in the same period. As the reader can quickly see, the operating leverage is apparent on cash-flow as the free-cash-flow as a percentage of automotive operating cash-flow increased from 25% to 50%. (Because of Ford Credit, we like to isolate the automotive cash-flow and look at the two units independently.)
On a cash-flow per share basis, through 9/30/11, Ford is generating $2.08 per share, and thus is trading at 5(x) 4-quarter trailing cash-flow per share,, and $1.05 in 4-quarter trailing free-cash-per share, which leaves Ford at 10(x) free-cash per share. The metrics look even better when Ford Credit is included.
The rating agencies recently raised Ford’s credit rating to BB+, which is the highest non investment-grade credit rating a credit rating agency can confer upon a corporation.
Q3 ’11 earnings were a disappointment as Ford’s North American and European pre-tax auto margins werent what was hoped for, and the stock got pounded further.
Ford is down from near $17 in January to the $10.50 print today, and thus like Alcoa represents one of our poorer trades this year. Despite the improvement in seasonally-adjusted auto sales (SAAR) and the continued market share gains at Ford, the stock has not performed well, part due to commodity costs but i think a big part of it is automotive margins. However cash flow and balance sheet improvement is obvious.
At some point F will pay a dividend, and the company will get the coveted investment grade rating, but the lack of meaningful guidance on the dividend was another sore spot for analysts on the q3 ’11 earnings call. Let’s see how Ford does in terms of November ’11 sales - they have had the right product and the right price since the ’08 - ’09 recession and i expect Alan Mullaly to keep the company on the right track for a while. SAAR auto sales are still in the 13 ml range, which is well shy of the peak sales in ’06 despite an aging fleet of cars on the road today.
Ford is the only auto company we own for clients (and want to own) given Ford didnt take any of the bailout money offered in ’08. Mullaly has managed the company through a very tough time, and has the chops to take Ford from survival to growth mode once again. We likely wont hear about any potential dividend until Jan 12′ earnings, but i think we are getting closer to management guidance on “capital allocation” and returning that capital to shareholders.
Long Ford (added to position recently - waiting to see how Nov ’11 sales look)
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