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Stock Stories | Stock Market Investing 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.