ggFord 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.
History of Ford
- 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.
Valuation and Closing Thoughts
- 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.