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Ford Motor Company Stock Isn’t As Cheap As It Looks

F stock looks deceptively cheap, but that's not the full story

ford stock

Source: Shutterstock

Since I last wrote about the company in June, Ford Motor Company (NYSE:F) stock is up 11.34%. Ford stock has risen slightly less than the Dow Jones Industrial Average, up 12.46% since June 20.

Investorplace contributors differ on their outlook on Ford stock. Last month, Josh Enomoto suggested taking profits and selling Ford stock. On the other hand, Dana Blankenhorn has a relatively optimistic outlook on the company, seeing the company as well-equipped for the future.

I think there is something to be said for both arguments. A report by the consulting firm Navigant released in April named Ford as the leader in self-driving car technology, ahead of hotter stocks like Tesla Inc (NASDAQ:TSLA) and Alphabet Inc (NASDAQ:GOOGL) (NASDAQ:GOOG).

On the other hand, as contributor Ian Bezek recently noted, the U.S. auto market remains weak, with prices falling for eight consecutive months through August.

On Wall Street, four analysts rate Ford a “hold,” two think it’s a “buy,” and one analyst advises selling Ford stock. Their average price target for F is $13.17, 6.38% higher than its Tuesday closing price.  

My view hasn’t changed much since June; I see Ford stock as a possible value trap. Ford stock looks deceptively cheap, but risks abound.

And when you scratch beneath the surface and look at more sophisticated measures of valuation, Ford stock doesn’t even look that cheap.

F Stock’s Risks

In my June article, I laid out two scenarios for the economy. The first is a strengthening economy, which pushes interest rates upward. The second was a slackening economy.

In both scenarios, Ford could underperform the broader market.

Car manufacturing is a very capital-intensive, cyclical industry. Ford needs to borrow money to invest in fixed assets. Ford currently has a debt-to-equity ratio of 4.49, meaning that for every dollar of shareholder’s equity, the company owes $4.49 in debt.

Currently, interest rates are low. But as I mentioned in June, interest rates move in long-term cycles. The Federal Reserve raised its target rate three times over the past 12 months, and this could continue.

Economists polled by Reuters believe the Fed will raise rates next month, and a majority expect three more rate hikes next year.  

Financing itself with debt would cost Ford more if rates rise.

Source: St. Louis Fed

Higher interest rates would also impact Ford’s sales. People buying cars today enjoy relatively low interest rates; higher interest rates would make buying a car more difficult.

This could be a gradual headwind, but a headwind nonetheless.

Ford’s debt burden could also pose a problem if the economy weakens. It might have trouble making interest payments if sales fall.

Over the trailing 12 months, Ford’s operating income was $3.27 billion, while Ford paid $1.084 billion in interest expenses, giving it an interest coverage ratio of just 3.01.

And cyclical stocks like automakers suffer more in the event of a downturn, although Ford weathered the last downturn better than Chrysler and General Motors Company (NYSE:GM).

F Stock Isn’t As Cheap As It Looks

On finviz.com, Ford stock looks deceptively cheap.

Ford stock trades at 11.28 times earnings, 7.85 times forward earnings, 0.32 times sales, and 6.12 times free cash flow.  

But, as I mentioned in my article on Rite Aid Corporation (NYSE:RAD), these measures of valuation don’t provide the full picture.

Companies can finance themselves by issuing debt or selling stocks, and market capitalization only looks at equity financing, not debt. But debt needs to be taken into account.

As I wrote in September,

“If you want to buy a company valued at $2 billion which owes $4 billion in debt, you would have to pay at least $6 billion, since you become responsible for its debt.

Likewise, if you want to buy a company worth $4 billion that has $2 billion in cash and no debt, your effective purchase price would be more like $2 billion, since you get the cash afterwards.”

Enterprise value, which adds net cash and debt to the company’s market capitalization, provides a clearer picture. Ford has a market capitalization of $50 billion, but Ford owes a lot of debt, giving it an enterprise value of $160 billion.

When enterprise value is used instead of market cap, Ford stock no longer looks so cheap. Ford’s enterprise value to free cash flow multiple is 19.58, much higher than its price/free cash flow multiple of 6.12. 

As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2017/12/ford-motor-company-f-stock-not-cheap-as-looks/.

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