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Here is Why We are Betting on Ford

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By: Darren Gold
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The Ford Motor Company’s (F) cheap valuation of less than 10x presents an attractive entry point for investors seeking long-term gains. The US’s second-largest automaker is currently focused on transforming its reputation from a ‘has-been’ company to one focused on designing and developing the next generation of automobiles.

Its centrality to the American auto industry and its positive earnings outlook has a lot of analysts favoring the company over other carmakers. Here are six reasons why Bidness Etc thinks Ford stock should be in your investment portfolio:

Rising Domestic Auto Sales

Major automakers have registered sales volume growth in the high single and low double-digits this year. US domestic auto sales have risen close to 4% year-over-year (YoY) during the first nine months of 2013. The trend was reiterated in November auto sales data, which revealed 9% YoY sales growth for a seasonally-adjusted annual rate (SAAR) of 16.4 million vehicles.

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Ford sold close to 160,000 units in the month, which was a 7% increase from sales in the same month last year, according to the latest data. Ford’s F-Series pickup trucks were once again the bestselling vehicle in 2013 – a reputation they have upheld for almost a decade.

It is expected that Ford’s pickup trucks will continue to be in demand in the near term as the housing market recovers, as sales of pickups have historically been correlated with housing market activity.

Healthy Financials

Ford’s cash flows from operations increased from $10.1 billion in 2010 to $13.7 billion in 2013, and the management used the extra cash to deleverage the company’s balance sheet and increase dividends to shareholders. Its debt to equity ratio (D/E) has subsequently declined to 75.8%, compared to 86.9% in 2011. Meanwhile, the company has also returned $1.3 billion in dividends to investors during the last 12 months, compared to the $763 million paid out in FY12.

Ford currently generates nearly $29 in profits for every $100 of shareholders’ equity – much higher than its competitor, the General Motors Company (GM), which earns only $9 for every $100 of shareholders’ equity. The gap indicates that the Ford management is much better at getting the most out of shareholders’ money – but this has surprisingly not been reflected in the stock’s year-to-date performance. Bidness Etc feels that the stock, currently priced at only nine times next year’s expected earnings, is relatively cheaply valued and offers a good entry point for investors.

Lastly, the number of days it takes Ford to turn over its inventory has declined to around 14 days (as of the latest quarter) from 20 days in 2011.

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The short interest in Ford stock is currently around 77 million shares, or around 2% of its float. In contrast, the short interest in General Motors is higher at around 9% of its total float. Ford’s short interest ratio – the number of days needed for investors to cover their short positions in the stock – is two days; the comparable figure for General Motors is four days.

Ford has a 12-month dividend yield of 2.42%, while General Motors has not paid dividends and may only start doing so next year after the US Treasury unloads its remaining stake in the company.

Favorable Earnings Growth

Ford’s earnings per share (EPS) grew 12% YoY in the third quarter of fiscal 2013, and analysts expect earnings for the full fiscal year to be 18% higher than last year. Earnings are projected to continue growing in the low double digits in FY14 and FY15.

Sell side analysts are largely positive on Ford’s recovery, with 60% of the analysts polled by Bloomberg giving a buy rating to the stock. The analysts’ consensus 12-month target price for the stock is $20 – which is a 17% upside from the current price of $16.7.

They have good reasons to be positive. Ford’s underlying fundamentals, as explained in this report, have shown encouraging improvements and the company has consistently reported profits for the past 17 quarters. This is surprising, given that Ford is a major player in the auto sector, which has been operating in a difficult and uncertain economic environment. The company has done surprisingly well to overcome challenges, given the overall slowdown in the domestic market, where it generates 56% of its revenues.

Ford has consistently beaten analysts’ earnings estimates since the first quarter of FY12. While the company’s overall unit sales fell in FY12, the fall was attributable mainly to divestitures and the company’s restructuring of worldwide manufacturing plants to prepare for long-term growth.

Growth in International Markets

Ford’s revenues from international markets have grown substantially over the past few years, but the European market has lagged behind. While 56% of Ford’s revenues are still generated in the US, its revenue share from Europe has declined from 33% in 2008 to 20% by 2012. Revenues from other international markets – including the Asia Pacific, Middle East and Latin America – have increased from around $15 billion in 2009 to $19 billion in 2013. They currently account for around 14% of the company’s total revenues.

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India and China have been especially prominent in generating robust demand in the last five years. Ford inaugurated a manufacturing facility in India in 1998, and the country has, over time, become an important exporter of Ford vehicles in the region.

The rapidly growing Chinese market is of utmost importance to Ford, and the company has recently started reporting unit sales in Asia with China as a separate segment.

Here are Ford’s three-year compound annual growth rates (CAGR) for sales, segmented by geographic regions:

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Electric Vehicles

According to the latest statistics released by the Electric Drive Transport Association (EDTA), plug-in hybrids and battery electric vehicles (BEVs) together account for 4% of all vehicles sold in America. The number is expected to rise as interest in electric cars gains momentum, and the release of new car models in 2014 and the setting up of a reliable, nationwide charging network are expected to boost demand significantly.

Battery electric vehicles (BEVs) like Tesla Motors, Inc.’s (TSLA) Model S, GM’s Chevy Volt, and Nissan Motor Company, Limited’s (NSANY) Leaf have seen healthy demand in recent quarters. Almost half a million hybrid and BEVs have been delivered in the US through October this year.

Ford is one of the biggest advocates of electric vehicles, the fastest-growing segment within the automobile industry. It provisioned $7 billion this year for R&D to cater to the growing demand for green vehicles. It has actively developed all-electric vehicles, and introduced several hybrid automobiles, including the Fusion Energi and the C-Max Energi. Both vehicles have been highly popular in their respective categories. The company has also announced a refreshed all-electric Ford Focus for 2014, and introduced the vehicle to Europe for the first time in August this year. Sales numbers have not yet been reported, but the model is expected to fare well in the continent.

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Replacement of Older Vehicles

Lastly, another important factor that needs to be considered is the fact that the average age of vehicles in the US has touched 11.2 years – which is a historical high. This means there is significant pent-up demand for vehicle replacement, which is expected to roll over into 2014 as well. Ford’s cars are already selling well, and vehicle replacement demand is expected to buoy demand going forward.

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