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Stock Stories | Case Studies and Mental Models for Individual Investors

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 share
  • Total shares outstanding as of 2Q 2018: 3,998,000,000 shares
    • 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 debt.
    • 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 earnings. 
    • 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 recession strikes.
  • 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.