Is Ford’s Stock a Buy After a Record Quarter?

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With shares of Ford Motor Company (NYSE:F) trading around $11, is F a Buy, a Wait and See, or a Stay Away? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s MovementFord C Max

On October 30, Ford posted third-quarter 2012 earnings that showed pre-tax profits of $2.2 billion, or $0.40 per share. This makes 13 consecutive quarters of pre-tax profit, and three quarters in a row where the company beat Wall Street expectations.

The company logged $2.3 billion pre-tax profit from its North American business unit, which boasted a record 12 percent operating margin. Ford posted pre-tax profit of $9 million in South America, and $45 million from its Asia Pacific Africa unit.

Last week, Ford announced that it would be closing three plants in Europe, including a major factory in Genk, Belgium. The facility will cost about $1.1 billion to close for an estimated savings of $730 million annually. The 4,300 employees and local government have made an effort to change the company’s mind, but overcapacity and evaporating demand will force Ford’s hand. European demand has dropped by nearly 20 percent, and Ford is only operating at about 52 percent of its capacity, resulting in massive losses estimated to top $1.5 billion for the region in 2012.

H = High Quality Pipeline

Instead of trying to cover the entire scope of Ford’s product line up, we’re going to highlight just one recent U.S. launch. Ford’s model-year 2013 C-Max Hybrid SE is hitting the American markets, and is taking punches at Toyota’s (NYSE:TM) Prius V.

This launch is significant given the phenomenal success of the Prius in the U.S. The Prius family is by far the best selling line of hybrids, and if Ford is going to continue its North American power play, it needs a strong competitor in the space. There were 322,515 hybrid car sales in the U.S. in the first nine months of 2012, compared to just 189,063 for the period a year ago. The Ford Fusion comes in pretty low on the list of best selling hybrids in the U.S.

Ostensibly, the C-Max is the contender that Ford needs. According to Edmunds.com, the C-Max has 188 horsepower compared to the Prius V’s 134. The C-Max gets 47 mpg on the highway versus 40 mpg for the Prius V. The C-Max even costs less, with a sticker price of $25,200 compared to $26,550 for the Prius V.

To be fair, the Prius V is more or less the runt of the Prius family.

E = Debt to Equity Ratio is Close to Zero

Ford’s debt-to-equity ratio of 5.86 looks pretty weak when compared to major competitors. General Motors (NYSE:GM) has a debt-to-equity ratio of just 0.36, while Toyota clocks in at 1.12.

It’s also a good habit to look at total debt and total cash, which for Ford is $23.79 billion in cash and $99.9 billion in debt. General Motors has $32.61 billion in cash, and $14.79 billion in debt, while Toyota has $38.86 billion in cash, and $149.01 billion in debt.

T = Technicals on the Stock Chart are Weaker than Preferred

As of October 30, 2012, the stock price is 2.09 percent above its 20-day simple moving average, or SMA; 3.64 percent above its 50-day SMA; and 3.82 percent below its 200-day SMA.

Since the beginning of 2012, the stock price has been in a downward trend, losing 6.92 percent this year to date, and 11.3 percent year over year.

E = Earnings Are Increasing Quarter over Quarter

Fiscal Year 2007 2008 2009 2010 2011
Revenue ($) in millions 172,455 146,277 118,308 128,954 136,264
Basic EPS ($) (1.38) (6.46) 0.86 1.66 4.94

(Fiscal year is January-December.)

Quarter Sept. 30, 2011 Dec. 31, 2011 Mar. 31, 2011 June 30, 2012 Sept. 30, 2012
Revenue ($) in millions 33,047 34,576 32,445 33,211 32,100
Basic EPS ($) 0.41 3.32 0.35 0.26 0.40

E = Excellent Relative Performance to Peers

Many investors favor return on equity as a key metric to diagnose how well a company is operating. On this metric, Ford’s performance is pretty outstanding compared to its rivals. Ford boasts a whopping return on equity of 158.42 percent. This type of return is something to pay attention to, as GM has an ROE of 15.36 percent, and Toyota has an ROE of just 5.52 percent.

Operating margins are also critical for stock evaluation. On this metric, Ford and its competitors all clock in around the same ball park, but Ford — backed by recent record margins from its North American unit — takes the lead. Ford’s operating margin is 4.61 percent, compared to GM at 3.39 percent and Toyota at 3.96 percent.

T = Trends Support the Industry in which the Company Operates

Industry trends is one of the reasons why we pointed to the C-Max Hybrid SE. Fuel economy is increasingly important as consumers grow on the idea of paying less at the pump, and the government pushes tighter regulation. Many consumers who want to make the switch to a hybrid are looking for an excuse to buy American, while others are just waiting for a hybrid that feels less like a go-cart.

Consumer preference aside, the auto industry is crawling through a brutal recovery. Ford has made tough decisions in America in order to bring itself back to the level it is now: 30 percent workforce cut, 25 percent capacity cut, and a hard push for concessions from labor unions. Recent developments point to a similar path in Europe, where losses are unprecedented.

The road to recovery for the auto industry is not an easy one, and companies across the board— including Ford — have faced staggeringly difficult decisions and hard economic times. However, when the sun is shining again, Ford could emerge leaner and healthier than ever.

Conclusion

That being said, analysts have a mean target on the stock of $13.93. The fourth quarter could be rough given ongoing losses and restructuring efforts in Europe, and it’s unclear whether record North American profits will hold. The company’s Asia arm may rally in the wake of weak sales numbers coming out of Toyota and Honda Motors (NYSE:HMC). Initiatives in South America and India could presumably pay off as early as the fourth quarter, but substantial gains are more likely to come in fiscal year 2013.

Because of this, and the key metrics mentioned, Ford is a Wait and See.

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