Wednesday, April 27, 2016

Re-Review of Ford Motor Company

Today, as I was adventuring across the internet, I came upon an article that was posted about Google (GOOG), Ford Motor Company (F), and Uber's attempt at forming a coalition to aid in self-driving cars being pushed forward faster. This coalition has come about because of debates on road rules for self-driving vehicles which can be an insurance nightmare. It brought up the question as to the current status of Ford Motor Company and it got me to thinking, where does Ford stand currently?

Ford Motor Company , if you have been living under a rock and do not recognize the brand, is one of the largest automakers in the United States that is responsible for such vehicles as the Mustang, Ford GT, and Focus. The business revolves around the production, marketing, and of course, financing of these vehicles. In addition to this, the company has started to move forward, as noted by the article referenced above, into the area of autonomous vehicles under the brand name of Ford Smart Mobility. The company also operates in South America, Europe, the Middle East, Africa, and Asia Pacific. Ford Motor Company is also responsible for their luxury brand, Lincoln, although the luxury brand only makes up 360 dealerships of a total of 11,971 dealerships.

Ford Motor Company currently trades at a price of $13.75 a share which is directly below their 52 week high of $16.10 and a good amount above their low of $10.44. Given the share price, this equates to a 4.42% dividend yield as their annual dividend issued is in the amount of $0.60. The dividend appears at first look to be very safe as this only comes to a 32.6% payout ratio. This being said, it appears to have a lot of room for dividend payouts.

The company currently boasts an EPS of 1.84 and a P/E Ratio of 7.37x. The EPS is fair given the industry but the P/E Ratio leaves a lot to be desired. Stocks trading at a P/E ratio of less than ten always seem to worry me. As a P/E Ratio is useful for evaluating whether a company's price relative to their per-share earnings is fair, a stock trading for less than ten presents an issue. This would appear to suggest that market sees value in Ford Motor Company but not at a level that expects further growth.

Pair this with the massive amount of debt that Ford Motor Company carries and you have an even bigger issue. Currently, the company has a debt to equity ratio of 6.85. This is incredibly high and it should make any investor sweat with nervousness. This shows that the company is relying on a high level of debt rather than equity to continue their operations. A high D/E ratio presents a huge warning sign for things to come as I believe that the auto industry can be very cyclical and the market has seen highs in the recent past. I take this as a sign that bad things are to come in the near future. It is therefore questionable whether Ford Motor Company will be able to dodge another bullet as they did with Cash for Clunkers during the last recession.

I do not however want to skirt past the fact that the company is actually very profitable. At current, the return on equity is at 27.78%. This shows that in general, the company is profitable. Profits do not mean everything however. Lots of companies are profitable. What separates out a company that is worth my investment is a company that is both profitable and without a huge debt load that would not be able to be paid off if they had to pay them immediately. The second part is where Ford Motor Company fails to pass my test. I believe that given the current debt load, the company will very likely sink under the weight of their debts should another recession hit before they can pay most of it down to a lower amount.

This is not the only issue for Ford Motor Company. The company's continued prosperity is leveraged on a few key factors. The most notable would have to be the almost certain future decline in industry sales volume as a result of a recession. Secondly, there could be an unfavorable acceptance of new models that are released. The public can be a vicious double edged sword when it comes to new models. Where certain new models can make an unbelievable profit, an unfavorable model can utterly destroy margins. This refers to larger more profitable vehicles that could see a shift in sales towards less profitable, cheaper vehicles that usually results from a recession and or spike in oil prices.

Unfortunately, that is not all that the company could face to their disadvantage. The company can also face issues with their suppliers. As the auto maker does sometimes rely on single sources for components, they could find themselves cut off from access to a part if something bad comes of that supplier. This was seen most notably as an issue for Hummer when large amounts of their parts were no longer made and lack of quality replacement parts could be found. That being said, Ford Motor Company also has to deal with a factor that most factory based product manufacturers find themselves subject to; they have to deal with unions. Where unions can sometimes be a good and necessary thing for workers, they can be horror stories for auto makers such as Ford Motor Company if certain guidelines are not followed or if illogical demands are made by the union itself that the auto maker cannot meet.

With all of this being said, I still like the company - if only for the fact that they did not take a bailout like other American auto makers during the last recession. This love however cannot help justify purchasing shares in the company at current times. Even though they have a relatively cheap purchase price, an over 4% dividend yield, and a gross profit margin of 15.42%, it is far outweighed by the sheer amount of debt that I feel will ultimately topple the auto manufacturing giant. That debt I might add, is only getting bigger. Much like the Titanic that was said to be unsinkable, I fear that the future of Ford Motor Company is much the same unless they end up taking a bailout like GM did so many years ago.

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