Wednesday, 26 December 2012

Ford Valuations and Inaccuracies in Reporting

After a pretty breathtaking 2 day jump, Ford is now all over the news.  That's no surprise, in the last 3 days, F has jumped almost 10%, large for any stock.  Of course, whenever there's such a move, questions abound about valuations and whether its jumped too much for its earnings.

Unfortunately, reading through some reporting, its astounding how poor some research news are.  Lets look at a couple of data points.

1 - F is now trading at $12.79.  As you can see the 1 year chart below, that's not a crazy all time high in the stock.  As recently as April, it was trading at that level and while it has jumped a lot in the last 2 days, it is part of a very steady and relatively gradual rise since the August bottom.  A typical gradual drop earlier in the year and a gradual rise later in the year helps give confirmation that its a reasoned fundamental based change rather than a bubble/speculative play.  The 50 day moving average just passed its 200 day moving average only a few weeks ago.

If you look further back to 3 yrs, you can see we're nowhere near its post recession highs as it hit over $18 just 2 years ago.

Based on this, the price point is not indicating too much speculative bubble behavior.

2 - Valuation.  Price to earnings is obviously a very important measure.  If you go to Finviz, it'll show Ford has a P/E Ratio of 2.81 and a forward P/E ratio of 8.5.  Wow, a P/E Ratio of 2.8?!  A crazy bargain for a company that's generating profits, why wouldn't you buy it?  But this is where I see a lot of misreporting.  Like this article from Insider Monkey:     

From a valuation standpoint, Ford is cheaper than most of the other top-tier car companies. The stock trades at a current P/E of only 3x, while General Motors Company (NYSE:GM)'s earnings multiple is more than thrice that of Ford. We also find the profitability argument very compelling; Ford has the highest margins – 12% EBITDA margin and 8% operating margin - of the five stocks listed here. Based on next year’s EPS estimates, Ford could see upside of 20% by Christmas 2013, and a 1.6% dividend yield is better than most automakers will pay.

That's great, 3x better P/E than GM, its most comparable company?  Well there's a common saying about news being too good to be true.  If you dig into its earnings, from Wikiinvest, It reported Dec 31 net income of 13.6B but the other quarters has been 1.65B, 1.4B, 1.04B, and 1.6B.  Which one of these is unlike the other?  It turns out that in Dec 2011, Ford was able to record an one time $12.4B tax credit:

  • Full year net income was $20.2 billion, or $4.94 per share, an increase of $13.7 billion, or $3.28 per share, from a year ago. Net income includes a favorable one-time, non-cash special item of $12.4 billion from release of almost all of the valuation allowance against net deferred tax assets in the fourth quarter
  • Fourth quarter pre-tax operating profit was $1.1 billion, or 20 cents per share, a decrease of $189 million from fourth quarter 2010. Ford has posted a pre-tax operating profit for 10 consecutive quarters
  • Fourth quarter net income was $13.6 billion, or $3.40 per share, a $13.4 billion increase from fourth quarter 2010. As noted, one-time special items positively affected net income

So if you strip that tax credit out, Ford's P/E is much more in line with its competitors, at approximately 7-8 vs GM at ~10.  Now that's not saying Ford is overvalued, its just that its not nearly as a value purchase as poor reporting make it out to be.  

If you look at Ford's P/E over the last 2 years (from Bigcharts): You'll see it has hovered around PE ratios of approximately 6-11 range.  With a return to its historical ranges, you can expect some small bump in Ford price still possible as an 7-8 P/E is still somewhat on the lower end (though not by much).

So overall conclusion, Ford was undervalued from a fundamental valuation perspective during the summer bottoms and the last few months has seen it coming back to its appropriate ranges.  So Ford's stock price is unlikely to be an unsustainable run up and more of a proper valuation.  Based on its historical values, you can expect some upside still (long term) though the low hanging fruit of August prices has been picked rather handily already.

Disclosure: Am long on F stock.

No comments:

Post a Comment