There’s little question that the automotive industry had a better year than its home, Detroit, which filed for bankruptcy protection on July 18. Should investors kick the tires of carmaker shares? We take a look at Ford Motor Co. (F.N).
Standard & Poor’s recently raised its rating on Ford to BBB- and revised its outlook on General Motors Co. (GM.N) to positive (from stable) at BB+. Ford in particular has enjoyed the U.S. economic recovery, with a return in the past 12 months of 70.7%. Ford investors may be somewhat nervous about the departure of CEO Alan Mulally, who has carefully steered the company through the unprecedented events of the last seven years. In particular, his early moves to stabilize Ford’s finances paid rich rewards, with Ford being the only Detroit automaker not requiring a Washington bailout.
Even after a stellar year, F remains relatively inexpensive, with StarMine’s Intrinsic Valuation model calculating that the company need only grow EPS at 3% per year in order to justify the current share price. According to Street Events, Ford will report its Q3 earnings on October 28, with the IBES estimate sitting at $0.357. The StarMine Smart Estimate is significantly more bullish â€“ it’s currently 4% higher at just over $0.37. This is primarily due to many of the analysts at or above the smart estimate having excellent track records at forecasting Ford’s quarterly and annual EPS numbers.
Further upgrades possible
Ford remains relatively attractive on valuation metrics, and is likely to see further upgrades in the event of a positive surprise for the quarter. There’s certainly room to move; Ford is not yet a consensus buy among the sell side, with 10 buys, six holds and two sells.
As car sales are still only returning to pre-recession levels (admittedly average levels here are the levels of the great moderation and credit binge) current earnings look eminently sustainable.
The only point of note is leverage, an area of concern for much of the industry globally. Ford currently sits on a mountain of debt, much of it maturing in 2015/2016. It would be nice to see the company using its cash flow to pay down some of its debt, which would leave it in a stronger position to weather the next downturn.
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