Ford Motor Company (F)

[lecorb]

Ford Investor Day, Monday Sept. 29: Stock Potentially Trading At 30% - 35% Discount To Intrinsic Value

Seeking Alpha,Sep. 25, 2014 2:08 PM ET


Summary
•Ford holding an Investor Day, Monday Sept. 29, '14.
•Stock has been in trading range all year, after December '13 guidance;
•Europe is recovering;
•Think intrinsic value is $23 - $25 per share.
•Risk to stock is the $14 per share price level;

Ford (NYSE:F) is scheduled to hold an Investor Day on Monday, September 29, 2014 and management might give some idea of Q3 '14 and 2014 guidance, which should include Q4 '14. (Of course that isn't a given, but it is hard to believe Ford management would hold an Investor Day and not give some idea of how the quarter and year are going, with just 3 months left in calendar '14.)

Ford management might talk 2015 at this early stage, but it wasn't until last December, 2013 that Ford management dropped the bomb about 2014 start-up costs, and basically crushed the stock at the end of 2013 and for this year so far.

Auto demand seems solid, and financing seems reasonable, so guidance should be more about Ford's cost structure and margins as much as anything else.

According to Ycharts.com, F's total return (the stock) is down 4.5% for the last 30 days, but is up 8.82% YTD (trailing the SP 500, but not as much as I thought) however F is down 2% for a trailing 1-year return, versus the SP 500's 20% 1-year return.

F's return data over various time periods

Period F SP 500
1-month -4.42% +0.66%
YTD 8.82% +9.74%
1-year -2.17% +20.18%

* Source: Ycharts.com

We've written repeatedly about F over the last few years (here, and here) and have a nice capital gain on the stock, which we have held in client accounts since early 2010.

Although not the focus of this article, our recent article on GM (NYSE:GM) briefly discussed Ford, with GM trading at a steeper discount to intrinsic value at that time. Now with both stocks having fallen or consolidated for most of 2014, and both stocks look cheap and are trading at healthy discounts to intrinsic value.

However, this article is about Ford, and I do think fair or intrinsic value is $23 - $25 per share.

Recent data points: Ford has seen strong retail demand all spring and summer, but has lost market share YTD. F's 14.9% YTD market share is down 120 bp's, and per one analyst estimate, every 50 basis point decline is worth $650 ml in earnings before interest and taxes (EBIT) and $0.10 per share in earnings per share (EPS).

Surprisingly, Ford's consensus EPS and revenue estimates (per Thomson Reuters) is tracking steady to slightly higher for calendar 2014, despite the market share data.
As the reader can see, after December 2013's guidance for calendar 2014 crushed the EPS estimates (mainly due to launch costs for a plethora of new Ford models being introduced this year), EPS estimates have been steady since April '14 for calendar 2014.

2015 is looking quite healthy from both an EPS and revenue perspective, so we DO NOT want to hear Ford management make cautious comments about 2015 either on Monday September 29th, or on the Q3 '14 earnings call in late October.

Despite incentives not being too heavy, I don't like to see the negative revenue revisions for F for 2014. Since Jan '14, the consensus revenue estimate for F has fallen almost $2 billion, or 1.5%. For a high operating leverage business like F, a 1.5% change in revenues, is not an insignificant deal.

Ford management may not choose to comment on calendar 2015 until later in 2014.

Technicals: Ford bounced off its 200 day moving average this week, and is currently trading above the key level of $16.27. The stock is oversold on the daily chart. Ford could trade as low as $14 and still be technically intact, but we are hoping that doesn't happen (obviously).

The early January '11 high for F was $18.97. That continues to be a key level for the stock.

A quick look at the positives and negatives around F:

1.) With the recent estimate of 15.5 to 17.5 million cars expected to be sold in 2015, overall consumer demand should be supportive of F's financials;

2.) Europe as a region was in the black in Q2 '14 for the first quarter since June, 2011 or 12 quarters. Europe's operating income was just $14 million, which translates into 3/10th's of a cent, given F's 4.05 billion shares outstanding but in 2013, Europe was a $0.40 drag on EPS. If only F's non US operations can breakeven, it would add nicely to F for a calendar year;

3.) Ford's pre-tax auto margin is at a record thanks to numerous initiatives to improve productivity and lower fixed costs at F. The higher expected auto volume COULD help drive margin gains, but the fact is they will be harder to come by at this point in the cycle;

4.) Ford's balance sheet and free-cash-flow have improved greatly the last 3 years. Ford's 4 qtr trailing free-cash-flow was over $2 billion as of June 30 '14.

Ford is currently yielding about 2.90% - 3% in terms of the dividend yield, while GM is yielding is 3.5%.

5.) Ford has a habit of lowering guidance sharply and then outperforming: in 2013, management guided to a $2 billion or $0.50 per share European operating loss. The loss was just $0.39 per share, which isn't great. Will the "launch cost" guide in 2013, which crushed the stock so far in '14 come in less than expected ?

6,) Can't recall the source, but the "average" car on the road today is thought to be 11 years old. There should be huge pent-up demand for new cars, which you would think we might have seen already given job growth and interest rates. Maybe higher incentives are required;

Negatives:

1.) Don't like to see the Ford market share losses in 2014;

2.) The fact is a union company with high fixed costs and high operating leverage is always a risk. Would prefer to see revenue estimates turn higher for F, which would indicate better demand and pricing;

3.) The transition to aluminum is always a risk. The product transitions that cost 2014 EPS estimates are a risk and we are poised to hear how these new 2015 launches will fare, particularly the F150;

4.) As Europe has turned positive on a breakeven level, South America lost $295 million in Q2 '14 and has lost money for 3 consecutive quarters;

Valuation:

Ford's current consensus EPS for Q3 '14 and Q4 '14 are $0.31 and $0.37, which is a 30% y/y drop for Q3 '14 and 20% expected growth in Q4 '14.

Current revenue consensus is $34.1 bl in revenues for flat y/y growth in Q3 '14 and $35.8 billion in Q4 '14 for expected revenue growth of 1%.

Full year 2014 consensus is expected to see 20% drop in EPS on basically flat revenue growth.

Full year 2015 consensus at this point is expected at 44% EPS growth on 7% revenue growth.

If we blend the two years investors still get positive low single digit revenue growth and roughly 10% - 12% EPS growth.

Our intrinsic value model puts a $28 fair or intrinsic value estimate on F, while Morningstar's model values Ford closer to $25 per share.

I do think "peak earnings" for Ford could be $2.50 - $3, but the stock historically never really trades more than 10(x) earnings. Given F's high operating leverage, more than 7(x) earnings or 5(x) EBITDA (earnings before interest taxes depreciation and amortization) is a plus. However because Ford has record high margins today and will likely sustain them, we think 10(x) the forward multiple is sustainable.

Today's price still leaves the stock trading at a substantial discount to fair value.

To be frank, I think you can either Ford or GM here providing you have a holding period longer than a few months.

Given the December '13 guide for F, this Investor Day is critical for Ford.

http://seekingalpha.com/article/2521255-ford-investor-day-monday-sept-29-stock-potentially-trading-at-30-percent-35-percent-discount-to-intrinsic-value?app=1&uprof=44