Oct 3, 2018
Ford is one of the largest automakers in the world and is famous
for its brands such as the Ford F-Series, Mustang, and many
others. It is the largest family owned business in the world
and makes cars, trucks, and other vehicles. Below are some
notes from my analysis:
- Current share price in October 2018: around $9.20 per
- Total shares outstanding as of 2Q 2018: 3,998,000,000
- So total market cap right now is about $38 billion
- Expected earnings in 2018 to be $1.30-$1.50 per share, which is
a P/E of 6-7x
- Cash net of debt (including marketable securities of Ford Motor
Corp. but not of the credit business) is $9 billion.
- This equates to $2.25/share in cash, which is a decent
amount. Really though it is a negative cash position of -$115
billion when accounting for all short and long term debt on the
balance sheet. This is -$28.00/share in
- The amount of net cash the company had in 1987, when Peter
Lynch wrote about it, was $8.3 billion. So the cash position
has gone up and down over time, but is significantly lower now when
accounting for all debt.
- Ford Credit earned $2,300,000,000 in pre-tax profit in
2017. In 2018 it earned $1,286,000,000 in pre-tax profit in
the first half of the year. It looks like based on the most
recent trends that it will earn around $2 billion for the whole
year of 2018 (although sales of cars and trucks tend to slow down a
little bit by the end of the year).
- If we do what Lynch did and analyze Ford Credit as a
stand-alone financial company, we apply a 10x multiple to the
- So, Ford Credit is worth around $20 billion. Dividing
this number by the shares outstanding, we see that the financial
business of Ford is worth around $5.00/share.
- So, let's put this together. Current share prices for the
business is around $9.20. The net cash position is worth
nothing. The financial business is worth around $5.00.
9.20 - 0 - 5.00 = 4.20. This equates to the car business
being available for purchase for $16.8 billion.
- Comparison point from the past, at the beginning of 1994:
- Ford had 464 MM shares outstanding (common stock).
- Only 940 MM in profit for 1993, so $2.02 per share.
- 1984: $2.9 billion in profit
- 1985: $2.5 billion in profit
- 1986: $3.2 billion in profit
- 1987: $4.6 billion in profit
- 1989: $5.3 billion in profit
- 1990: $0.8 billion in profit
- 1991: ($2.2 billion) loss
- 1992: ($7.3 billion) loss
- 1993: $2.5 billion in profit
- Income from the Financial Services segment steadily grew over
time throughout this whole period - Ford increasingly financed a
higher percentage of cars, even though the total number of cars
sold fluctuated a lot.
- Share count has hovered at 3.9 billion over the past several
years - no change expected but dilution will likely occur if Ford
starts to burn a lot of cash
- Dividend has fluctuated a lot up and down over the past several
years - this is the way Ford does things and is likely to
continue. A dividend cut is almost certain when the next
- In 1987 the business made $8.92/share assuming full
dilution. That year it traded between $28.50 and
$56.37. That is a P/E ratio of between 3 and 6.
- The P/E is between 6 and 7 right now - so it is no unreasonable
for the share price to drop in half from here if profits (and
dividends as well) fall.
- Lesson: Peak Earnings Trap - the raw P/E number tells you the
stock is cheap, but that may just mean that the business has
reached a high point in the cycle with its earnings. Wait
until the earnings have collapsed and are starting to show signs of
turning around. This may make the P/E look artificially high,
but really it is trading at a discount.
- Example: Large oil companies can be an example of this.
They usually trade around 10x but sometimes look like they are
trading at 20x or 30x because oil prices suddenly collapse.