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Ford Motor (NYSE:F) received a lot of accolades for being the only American automaker to survive the Great Recession without government assistance. The stock’s traditional market valuation ratios like a Price to Earnings Ratio of 2.15 and a Price to Sales Ratio of 0.27 make Ford look like a bargain. Is it? Ford is getting a good deal of favorable buzz from average retail investors like you and me, so is it time to hitch on to Ford for an upward ride?
Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.
C = New EV/Hybrid Products and Global Expansion May Provide a Catalyst
We all believe stocks don’t move without catalysts and the more dramatic the catalyst the steeper the trajectory, upward or downward. If you define catalyst as something that moves the stock price, you can expand your view to include cumulative events and actions. Ford is late to the game with an EV offering, but by 2013 the Ford Focus Electric will start appearing in showrooms. It has some advantages over rival Nissan Leaf, but Ford appears to be betting more heavily on technological innovations to boost the fuel efficiency of its newer hybrids and conventional offerings. This is all a result of Ford sitting by as Toyota (NYSE:TM) created an incredible first-mover advantage with the Prius.
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Ford is going after rival GM’s (NYSE:GM) market dominance in China with an ambitious plant construction effort there. They also have a new plant in Romania where they plan to triple production of their EcoBoost equipped vehicles. Further, with Tesla (NASDAQ:TSLA) expanding the market for pure electric vehicles, Ford can piggyback off Tesla’s expensive innovation to develop similar yet cheaper products.
H = High Quality Pipeline
While Ford is not ignoring the demand for better Hybrid Vehicles they appear to be charting a different course than their competitors with a major effort with their EcoBoost engines. Cutting through the tech jargon, an EcoBoost engine utilizes some new technologies to make gasoline engines up to 20% more fuel efficient while reducing those nasty greenhouse gases by 15%. In a world supposedly going green, we all salute fuel efficiency and lowered emissions until we see the price tag of the vehicles that can get the job done. Ford’s new 1.0-liter EcoBoost engine supposedly delivers a jaw-dropping 58.9 Mpg. The 1.0 Liter EcoBoost could be a game–changer, having already won international acclaim by receiving the award for 2012′s “International Engine of the Year”.
E = Equity to Debt is Close to Zero
This is the one anybody who is bullish on Ford needs to think about. Ford’s debt to equity ratio is 6.03 or 603.54% when you see it expressed as a percentage. While auto manufacturers typically have higher debt to equity ratios due to their large capital expenditures (Capex), Ford’s position here should make all potential investors stop and take a deep breath. Global expansion may be a sound long term strategy, but it is alarmingly expensive and the wait to realize some profit from those new plants adds a lot of risk to the stock as profits can be a long time in coming.
To put things in a little perspective for average folks like you and me, Ford right now has cash on hand of around $15 Billion with another roughly $34 Billion sitting in short term investments. But their total liabilities are around $165 Billion. Even if you take out pension liabilities which come due gradually over time, you are still looking at around $120 Billion in long and short term debt.
If you have been in the game awhile you know what happened when Lehman Brothers went belly-up. Credit markets froze and should that happen again, a company like Ford would be in big trouble.
A = A-Level Management Runs the Company
Alan Mulally is one of those Wall Street icons reminiscent of the old E.F. Hutton commercials. When Mulally speaks, everybody on Wall Street listens. This guy is golden and his track record in turning Ford around is already the subject of a book and will continue to be talked about in business journals for years to come.
Conclusion: If you enjoy spending time at the tables in Vegas or Atlantic City and fancy yourself to be something of a riverboat gambler, Ford is worth a roll of the dice. Cautious investors should put Ford on a watch list but as far as pulling the trigger right now is concerned, shares recently hit a 52-week low of $8.82 per share and the latest earnings report is in the rearview. Investors may be smelling a buying opportunity…
Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.
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