By on December 22, 2009

(courtesy: MarketWatch)

The Wall Street Journal‘s Liam Denning figures it isn’t. He writes:

Ford expects to resume profitability in 2011, and the consensus forecast is for per-share earnings of $1.13. The implied price/earnings multiple of 8.6 times doesn’t sound too demanding. But as Chris Ceraso of Credit Suisse points out, it translates to a margin of earnings before interest, tax, depreciation and amortization of nearly 10%, something Ford hasn’t enjoyed since the late 1990s.

Such margins aren’t impossible, and Mr. Ceraso sees potential increases in Ford’s valuation to almost $13 a share under this scenario. But this assumes a vehicle market of 14.5 million in 2011, up from about 10.5 million this year, and Ford gaining an extra 1.3 percentage points of market share. At 13.5 million units and a more modest market-share rise, Mr. Ceraso’s model spits out a valuation of about $6 or $7 a share.

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34 Comments on “Is Ford’s Stock Price Sustainable?...”


  • avatar
    gslippy

    Five years ago, Ford was above $14, and around $10 only 4 years ago.  They are playing in a weakened market, but are relatively much stronger than their domestic competitors.  The 1-year scale in the picture is misleading.
     
    So I think the answer is yes.

  • avatar
    ash78

    If they can deliver a semi-sporty Grand C-Max to me, I can imagine 50% market share in my garage within the next 2 years (up from 0% currently).

  • avatar
    dwford

    I think Ford’s stock price reflects the growing belief that Ford’s plan is working, and that Ford enjoys a relative strength compared to other players in the market. Going forward, Ford has a better opportunity to move the needle on sales than its competitors, as it plans to enter several segments where it currently does not compete. What can Toyota and Honda and Nissan to move their needle on sales, since they are already established in every segment? Not much. Is the Crosstour or CRZ going to do much? Another new Camry? The Cube.

    Also, by creating desirable products, Ford has the opportunity to improve margins with high end equipment. Ford wouldn’t dream of trying to peddle a $23k Fiesta if the underlying product wasn’t very desirable. And witness the shortage for Taurus SHOs. People are waiting 80 days for a $40k Taurus! All of this is only going to get better as current products get replaced.

  • avatar
    Cammy Corrigan

    Funnily enough, I’ve been thinking about Ford’s stock price for a few days. I’m still not convinced that it’s sustainable. I’m still in the minority that think that Ford’s huge mountain of debt will crush them. Ford’s sales figures will need to increase hugely for them to make a reasonable dent in that pile of debt. I’m sure they’ll have a plan to attack it, but I remain on the fence.

    • 0 avatar
      Telegraph Road

      I’m still in the minority that think that Ford’s huge mountain of debt will crush them.
      With TTAC founder Robert F having moved on, perhaps you should continue his Ford Death Watch series.  That would make the comments here a bit more spirited.

    • 0 avatar
      geozinger

      @Telegraph Road: The deathwatch series were incredibly oppressive and irritating. I think most car fans have a heightened sense of what is going on with the business of automaking, but the deathwatch series amounted to piling on.
      Since they have been discontinued, I believe this site has become better to read without the heavy pessimism that the DW’s imparted. It seems we still get much of the same information. Now this site celebrates cars, seemingly having lost it’s morbid fascination of which car company is going to fall first.

  • avatar
    YZS

    In 2.5+ years, sure, it will be $15 or so easy.  In the next 3 to 6 months, little tremors in the market will make it bounce all over the place.  I got in a 7.25 and out at 9, I’d hold it, but I already have lots of roller coasters already and don’t need another one.  Although with perfect hindsight, wish I kept it for another week or two. 

  • avatar
    FromBrazil

    I dunno about sustainability and I ‘d even go as far as to say that it can be increased as the economy recovers and people regain confidence. I mean there’s a mass of consumers out there who have put their new car purchase on hold for 2 years and can’t wait to get rid of their “old” cars. Not probably the most savvy buyers, but we all know there out there.

    And another point. A more sweeping point. I don’t think Ford should be really worried about their stock price right now. They still need to focus on product, developing, building and delivering quality product. This way the stock price will take car of itselg. We all know the damage that American companies, specially manufacturing and heavy industry, have suffered from keeping their eye too much on Wall Street. I say ignore them Ford.

  • avatar

    If it reaches $40 a share, I’ll be a millionaire thanks to my  $1.50’s buy in on Scottrade :-P

  • avatar
    Contrarian

    I think most stocks are overvalued today.  The prices are where they were during the peak of the mid-decade boom.  I just can’t see how they’re justified with today’s stagnant economy.

    • 0 avatar
      ash78

      Yeah, there is definitely some sort of Optimism Freight Train going on in the market today. I think we’re set for another correction before we see any long-term growth (not just with F, but the market in general. I’m guessing F’s correction will be substantially more severe than the overall market due to the exact concerns expressed in this snippet).

    • 0 avatar
      dougjp

      Agree +1. All I see is (the latest catch phrase) “bubbles”. About to burst. Oops, sorry! That’s my champagne!

    • 0 avatar
      rnc

      If you think about it, there’s trillion’s of $ (various currencies) floating around, for about 5 years majority of money got poured into derivitives, even after the made up money blew away, there was still trillions of $ out there.  It has to go somewhere, the market is back to midlevel highs, but the make up is different, about 2005-06, the rest of the economy begin to decline and everything was financials and other companies related to real estate (the rest where basically stagnant with post dot com levels).  Money is just flowing back from where it came. 

      Ford is being rewarded (market showing faith), they have accomplished everything they said they would as GM/chryco died.  They have a plan to deal with balance sheet (haven’t released it, but rumor is they will pay of close to half (probably $10b) of thier outstanding “operating related” debt next yeart ($2 billion from Volvo, $5 billion in savings from the Veba (+) the fact that they paid off $2 billion early in the 3rd Q, 09 and it begins to seem plaus.).  It will keep rising slowly (little leaps each quarter and when debt is rated upwards) as long as they keep doing what they are doing.  

    • 0 avatar
      baldheadeddork

      I love it. No one saw a bubble of any kind for almost fifteen years and now they’re everywhere.

  • avatar
    BostonDuce

    I owned it when it was $1.30/share less than a year ago.  Sold it when I covered the round trip commission and never looked back.

     
     
     
     
     

  • avatar
    Patrickj

    Ford has gained positive attention for staying away from outright bailout, and some attention for increasing quality, mostly from insiders and enthusiasts.
    I don’t see where this has filtered out to the general public yet.  Sales of the Flex certainly aren’t showing it, and the Fusion is what an Amish housewife who got a driver’s license would probably drive.
    Enthusiasm is a bit premature.

  • avatar
    TrailerTrash

    The WHOLE market is over priced.
    But Ford has a few things going for it.

    1) The Ecoboost is one stunner of an engine.  It allows the middle class access to the European  power.  SOON, the entire line will have this option.  In fact, I myself am yearning for the Edge 3.5 Ecoboost.  That, to me, will be the best selling crossover next year.
    2) The auto market sucks for quality and reliability.  Ford is the ONE domestic people feel safe with and are getting rewarded with their purchases with quality reports on their cars.
    3) New models.  Ford has begun to bring in some really nice, attractive new models and the public is reacting possitively.

  • avatar
    highrpm

    I also bought in under $2 on the Ford stock.  I’ve been holding it on its entire run up and it has been great.  I have to say that right now Ford has a huge positive momentum in the media.  Based on that alone, folks are actually looking at Ford vehicles.

    The nice thing about this company, to me, is that they had profitable quarters in 2009, in the worst automotive sales year in decades.  So it bears to reason that they will only improve their profitability when sales pick up. 

    Remember, they sell cars in Europe and China too, and sales are up…

  • avatar
    MikeInCanada

    Ford is doing all the right things financially, however I must agree with Cammy Corrigan that the existing debt, plus the inevitable interest rate bump will crush (the stock price) at least.
     
    It would be interesting to see the stock price effect if/when the Ford family exchanged their multi-vote class of stock for regular traded shares.

    • 0 avatar
      baldheadeddork

      The Tigers, Lions, Pistons and Red Wings will all win championships in the same year before the Ford family converts its preferred shares. Na. Ga. Ha. Pen.
       
      In the 90’s there was a lot of complaining from hacks in business rags that Ford was doomed to never be competitive because it’s stock structure made it impossible for the really smart guys like Icahn to buy in and sprinkle their brilliance on the company. That’s a little too snarky, perhaps, but F was always an ugly duckling among institutional investors because fund managers felt they were unable to exert any control with common shares.
       
      Now it looks like a brilliant decision and Wall Street is (mostly) in love with the management at Ford, but that’s not going to last.  Sooner or later the big investors who have bought millions of shares in F this year are going to start complaining about having no voice in the company, and that’s going to create some resistance in the stock price.
       
       

  • avatar
    carguy

    Maybe the question should be “Is the DOW sustainable at over 10,000 in a recession economy?”
     
    While I undertstand that TTAC cannot resist a bad news story about a domestic auto maker, there is no point in picking on a single stock when big parts of the market are over valued.

    • 0 avatar
      baldheadeddork

      Good question.
       
      First things first, I only like using the Dow as a generic term to describe the stock market as a whole, and I’m guessing you’re doing the same. If you want to compare the value of the market to the economy you have to use the broader indexes like the S&P 500 or the Russell 2000.
       
      I think there is some evidence that the market as a whole is not overpriced. Dow 10K (or S&P 1500) is where the market was roughly ten years ago. If you bought an index fund in 1999, you’ve broke even for the decade. But in that same period, actual GDP has increased by about 33% in inflation-adjusted dollars. If the value of the Dow was growing at the same rate as the US economy, it would be at around 14,000 right now.
       
      But, you might say, 1999 was then peak of the tech bubble. The market was definitely overpriced then, right? That’s a harder call. There were some real bubble companies in the 90’s, but there was also a once-in-a-century explosion of a new technology that created a huge new sector of the economy in a very short period of time. Plus there was a flood of new investor dollars into the market that really picked up steam in the 90’s as personal retirement plans replaced company-financed pensions. There were a lot of good reasons for stocks to rise in the 90’s beyond stupid companies like pets.com and Webvan.
       
      In my semi-scientific, wild-assed guess, I think 10-11K is about right for where the economy is now. We’ve cleared the threat of a total economic collapse and the companies that grew most from the financial and housing bubbles are still crushed. As the panic has passed, people have put their money back into companies that look like they’ll survive and come out stronger in their industries.

  • avatar
    RobertSD

    I’m going to defend TTAC here (a rarity) because they’ve been fairly balanced to Ford recently.  So,  I don’t quite agree with your sentiment, carguy.

    Is the stock price sustainable at this price?  No.  But securities are generally overpriced right now.  It will be maybe 20%-30% lower sometime next year – not drastically out of line with the market.

    Will Ford’s debt kill them?  I don’t think so.  I used to think so but their cash position at the end of Q3 was much stronger than I anticipated, and they haven’t sold Volvo yet.  Even with rising interest rates (and we’d be fools to pretend they won’t rise), Ford’s debt load all of a sudden looks somewhat manageable.

    What are Ford’s risks: slower product cadence than required to maintain/grow marketshare.  I think there is evidence this might happen with GM playing the media quite well recently.  Ford has some old product that won’t get touched for at least 12-15 months (Escape, Focus) and some weaknesses or coming challenges even in newer products relative to their competitive sets (Lincoln, Flex, Fusion).  So, I see challenges to their revenue stream.  I also question their 550k unit production push in Q1 next year.  They must be expecting an extended shut down at sometime for a couple products or they are overly optimistic on the strength of the industry (I was expecting something closer to 450-500k).

    But, Ford’s done the right things to bolster resale (lower incentives, higher quality, etc) and that will help them sell more vehicles and reduce cost in their finance arm.  They’ve shown extreme agility and intelligence in the financial markets.  They’ve paid down $15B of debt in the last 12 months and raised close to $3B in cash through stock sales.

    So, near-term, $6.50-7 low sometime in mid- to late-2010 along with all the financial markets.   Back to the $9-10 range consistently in 2011.  I see them closer to $12-15 by the end of 2012.  Even at this price, there is still significant mid/long-term (3 year) opportunity.

    • 0 avatar
      carguy

      Robert – a fine analysis which I won’t disagree with but my point was that really all automakers in a pickle due to low sales volume and all stock are currently overinflated partially due to the low interest rates. Talking about the value of Ford stock without reference to the current condition of the equities market or even comparative value of other auto stocks doesn’t give you the whole picture.

  • avatar
    B-Rad

    All I know is, last year when it was about 50 cents a share, I wanted in.  I did not see a bankruptcy in Ford’s future, at least not for the next few years, and had reason to believe the stock would go up.  Unfortunately, everyone said Ford stock was too risky and since I don’t have that much money (and I’m a little lazy), I didn’t buy.  I’m very sorry now.

  • avatar
    guyincognito

    Wait, what do earnings have to do with stock price? As far as I understand a stocks value is derived entirely by hype.  If Ford records a profit, no matter how accountanted it is, expect Ford stock to skyrocket. I’m predicting $20/share.  When Chrysler is shut down I expect Ford stock to hit at least $50.

  • avatar
    Telegraph Road

    Jim Cramer on Ford stock on his Mad Money show yesterday:
    I will tell you what it is, it is a super-dee-duper buy… it is an unbelievable buy… I got to tell you Al Mulally has done a remarkable job, we should all be proud, you should be proud, I am proud.. this is really the great comeback story of all time… I think that Ford is going much higher… big numbers coming.

  • avatar
    Telegraph Road

    From a April 22, 2009 news article:

    On Friday, Credit Suisse equity analyst Chris Ceraso said that even while Ford is making progress, its stock price is over-valued…
    “We think the stock is worth about $3,” Ceraso said. “Thus, with the stock trading closer to $4, we do not think investors should chase it.”

    This analyst clearly can’t get ahead of the stock price. I pity his clients who sold F for less than $4.
     

  • avatar
    Z71_Silvy

    Ford’s sales are really lacking.  The Mustang is DOWN, F-Series DOWN, Taurus already down from October to November, the Flex has been a disaster (40K sales for the year versus the predicted 100K), the “new” for 2008 Focus is DOWN 10%, The Lincoln Taurus has been down over 20% for the past 5 months, The Edge is DOWN, etc.  The only thing Ford has going for it is the Fusion (for some reason) which is not making any money due to the re-skin and the Escape (again…why?)…which has not seen any significant upgrades since the introduction in 2001…so that may actually be making money.  Ecoboost is a joke (unless you call a V6 getting V8 mileage “ECO”).  Ford has carelessly invested a lot of money into gimmicks…and the sales are not there.  Lincoln is a fancy trim level on a Ford and Mercury needs to go away ASAP.
     
    And Ford has already screwed up the Fiesta by making it ugly (grille and LED “fog” lights with tin foil behind them), decontenting the HID/projector headlights…and not offering it with a nav system or a moonroof…yet they still overprice it at $23K…for a cheap rollerskate.
     
    Add to that the mounting Ford debt and dwindling cash pile…and you have a severely inflated stock.

  • avatar

    Ford is at the top of their game right now with fresh product and a competent outsider CEO. Being the only one of the artists formerly know as the D3 that does not carry a scarlet “B” also helps. If I held their stock right now I’d be chanting “burn baby burn” for RenCen.  Ford, Hyundai and Subaru are best positioned to capture GMs declining market share.

  • avatar
    baldheadeddork

    Is Ford sustainable at 10? Yes. I don’t have a bit of doubt about it. Remember this is an opinion on a stock price that you’re reading on the internet, but I think there’s a better than average chance that it will be pushing 20 at this time next year.
     
    There are all the reasons that have been mentioned already. They have the strongest lineup in the US market and they’re as strong as anyone in Europe. China is growing. (But GM is still outselling them there by 8:1.) They’ve done a great job of lowering their costs, they have a stable management team that knows what the hell they’re doing, they’re increasing their market share while lowering their average incentives, their cash burn is beating predictions, they have money to develop new product, unlike Honda they’re in a good position to grow market share – (breathe) – bottom line Ford is as well run and well positioned as any car maker on the planet. If car sales rebound before GM, Fiat/Chrysler or Toyota get their shit together, Ford is in an excellent position to make a fairly major move in the industry.
     
    But very little of that is likely to have anything to do with their stock price in the next year. The two big reasons why I’m bullish on the stock price in 2010 is 1) the company smells like a winner and 2) for the next eight or nine months they’re going to be compared overwhelmingly against the worst sales numbers in a generation, which is going to reinforce #1.
     
    It sounds insane, but the perception people have about a company has a massive effect on its share price. Look at Apple and Microsoft. Microsoft is a larger and more diversified company, their profit margins are 40% higher than Apple’s, their return on assets and equity is 50% higher than Apple, they have twice the operating cash flow, MSFT insiders own 50 times the percentage of shares in their company as AAPL insiders – and Microsoft pays a dividend. Yet when you compare the earnings per share to the difference in the stock price (to equal out the difference in the number of shares) investors have decided that the two companies are equal. It’s totally irrational, except that a lot of people like Apple and they want to be associated with it.
     
    The same is becoming true with Ford. There are thousands of better companies to invest in if you just look at the pages on Yahoo Finance. But Ford smells like a winner right now in an industry that is otherwise filled with doom and despair. Even though Ford isn’t profitable now, the (not irrational) belief that they will ties in with a part of investor psychology that wants to be successful, too. (It applies to consumer psychology, too. Ford will pick up market share if people perceive them to be more successful than the competition.)
     
    That can only carry you so far. But luckily for Ford they are going to start comparing against some brutally ugly numbers from last year. It’s entirely possible that Ford could report in March or April that its sales are up 20% over the same month in 2009. Yes, it’s a number that has a huge neon asterisk next to it because 2009 was such a crappy year, but the stock market usually doesn’t care about that. Show a double-digit increase in anything, for any reason, and more people are going to want to buy stock in your company. This happened with Chrysler when it came back from the grave in the early 80’s, and it’s happened with companies that have grown profits through acquisitions more often than I can remember.

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