Ford’s Valuation
Introduction
Ford Motor Company simply Known as F in the New York Stock Exchange, is an American multi-national company based in Dearborn, Michigan in Detroit. Henry Ford founded it in the year 1906. Its core business is the manufacture of automobiles under the Ford brand and other luxurious vehicles known as the Lincoln. It also produces heavy trucks, Farm Tractors and other spare parts or automotive components. The current chief Executive is William Clay Ford, Jr and is the great grandson of the founder of Ford Motor Company Henry Ford. It has over 117000 employees and operates in more than eleven countries i.e. US, UK, Germany, Australia, Mexico, South Africa, Brazil, China, Turkey, Argentina and Canada.
The corporate, social and environmental values of Ford Motor Company are well founded on ideal principles and practical considerations in its management structures. Towards achieving an enriched society, equal and fair sustainable development, Ford strives in cooperation with the society to effectively and efficiently use its resources harmoniously and to engage in activities that contribute positively to the changes affecting all its stakeholders. This activities target alleviation of persistent societal problems, and negative issues affecting the immediate community. Ford encourages and nurtures initiatives aimed at developing of potential personnel, Protecting and maintaining high environmental standards.
Ford, as a Global company engages the society in creating and fostering sustainable growth from the broad perspective of the current and the future of the earth and humanity. Ford participates in philanthropic activities and also engages in disaster prevention and recovery activities in the event of such calamities.
Ford is currently the second largest automaker in the U.S. and the fifth in the world based on 2010 world vehicle sales. By the end of 2010, Ford Motor Company was the fifth largest automaker in Europe. It’s ranked as the eighth overall American firm in the Fortune 500 the year 2010 list. (Ross, Westerfield, Bradford, 2010)
The following three strategies have been used to value Ford Motor group
- The method of Comparable transactions
- Multiple Company analysis and comparisons
- Discounted Cash Flow (DCF)
The method of comparable transactions
Ford Motor Company has a market capitalization of over $67 billion dollars compared to slightly over $50 billion market capitalization of its rival General Motors, and against the industry’s average market capitalization of $22 billion. The market capitalization is obtained by multiplying the outstanding stocks by the current price of the ordinary share price. Ford Motor Company enjoys a quarterly revenue growth of 0.1% compared to -0.02 of general Motors.
Ford Motor Company has a Beta of 1.57 i.e. the rate of Ford’s return on its assets and also the financial elasticity or the volatility of the assets returns and the systematic market risks involved. A beta of 1.57 means that Fords returns has a 1.57 times the magnitude of the average or overall markets returns i.e. if the market’s average returns falls by 2% then Ford’s retuns will also fall respectively by 1.57 times the average fall i.e. by 3.14. Its volatility is within acceptable limits. (Levinson, 2006)
The price earnings ratio of Ford is 11.61 while the earnings per share for the year 2012 were 1.48. The dividend yield cover for the same period was 0.4. The shares for Ford were trading at 17.12 dollars per share at the close of business in the year 2012.
Ford’s investment strategy involves adoption of the modern technology that will facilitate more attraction to its own sales. This has led to increased improvement in sales as a result of the research performed the Ford Company. These increased sales were as a result of its efficiency in fuel consumption. The company utilized $5 billion, $4.7 billion & 7.1 million. These were for the years 2010, 2009 and 2008. Ford has also registered significant progress in cost reduction
The comparison of Ford Motor Company as compared to General Motors.
The data used is from www.yahoo,finance.com
The quick ratio is part of liquidity ratios that shows the ability of the company to meet its short term financial obligation. Ford motor Company has a quick ratio of 0.11 and 1.83 while General Motors has 1.29 and 1.02 for the quick ratio and current ratio respectively. A higher ratio of one and two implies greater liquidity while lower financial risks for the short time lenders. A quick ratio of 0.11 means that the ford’s debtors have a shorter period to repay their debts while a current ratio of 1.83 is not so bad as the current liabilities should be less than half of it current assets.
The leverage ratios analyze the extent in which a company depends on debts to fund its operations and investment. The debts to Equity ratio indicate the company’s dependency on debt for financing.( Levinson, 2006).
The interest coverage ratio shows the company’s ability to maintain its fixed interest charges without falling into more debts. The profitability ratio indicates how profitable the company is.
The Forecasted prices for the years 2014- 2015
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The forecasted Share prices for the year 2014 and 2015 respectively are 16.14 and 16.68 respectively. The forecast is reasonable and within normal range. www.yahoo,finance.com
The total cash flows from financing activities increased greatly from a negative ($4241000) in the year 2011 to a positive amount of 3705000 in the year 2012.
Profitability ratios.
Financial statement valuation includes valuations of the corporations’ financial statements to get and extract the financial information that can be used in decision making. For instance, a valuation of the financial statement can reveal whether the company can afford to pay its long term liabilities, whether the Corporation is efficiently utilizing its physical assets, whether it has maximum financial mix in capital structure and whether it’s generating enough income for its shareholders. Investors would be interested in information touching on the profitability of the company and the financial ratios. (Vance, 2003) Ford’s cost of production compared to sales is 81.6% and 82% for the years 2012 and 2011 respectively. This represents a very high percentage in the production department’s costs that may call for additional efficiency in Ford’s management. The Gross profit margin for the years 2012, 2011,2010 and 2009 for Ford were 18.43%, 18.12%, 20.28% and 15% respectively. Total sales less cost of production equals to the gross profit. (Khan, 1993)
The operating profit margin (profit before tax/turnover * 100) for Ford Motor Group decreased to 5.75% from 6.37% in for the years 2012 and 2011 respectively i.e. the overall operating income dropped from $7760, 000 in 2011 to $6291000 in 2012. Ford’s Net Profit Margin experienced a negative growth of 10% in net income from 14.84% in 2011 to 4.22% in 2012. (Profit after taxes/turnover * 100)
The net income reduced by almost 71% from the year 2011 to the year 2012 i.e. from a net income of $ 20,213,000 in 2011 to $5,665,000 in the year 2012. www.yahoo,finance.com
Multiple Company analysis or Comparable Company Analysis.
In this case we shall compare the performance of Toyota Company, Honda and Ford.
Investors would be interested in information touching on the profitability of the company and the financial ratios. Toyota Motor Corporations’ sales decreased by 2.2% for the period between 2012 and 2011 but it had improved by 0.23% for the previous period i.e. 2011-2010. The sales of Toyota Motor Corporation are more than twice the combined sales of its competitors Honda and Ford for the year 2012. Its profitability ratios reveal an interesting scenario. Toyota Motor Corporation has also a market capitalization of slightly more than 12 billion compared to 5.6 billion and 48.6 million of Honda and Ford respectively. It’s obvious that Toyota’s market capitalization is twice the combined market capitalization of both Honda and Ford. The cost of production accounts for 79.25% of the total sales for the year 2012 and 78% for the year 2011 for Toyota Motor Corporation. Honda’s cost of production compared to sales is 67.8% and 66.4 for 2012 and 2011 respectively, while Ford is 81.6% and 82% for the years 2012 and 2011 respectively. This represents a very high percentage in the production department’s costs that may call for additional efficiency in Toyota and Ford’s management. The Gross profit margin for the years 2012, 2011, 2010 and 2009 were 20.75%, 22.03%, 23.19% and 24% respectively for Toyota Motor Corporation. Honda’s gross profit was 32.2%, 33.61%, 32.57% and 33% for the similar period respectively while Ford’s was 18.43%, 18.12%, 20.28% and 20%. Total sales less cost of production equals to the gross profit. ( Khan, 1993).
The operating profit margin (profit before tax/turnover * 100) increased to 2.97% in 2012 from 1.54% in 2011 for Toyota Motor Corporation while Ford Motor Group decreased to 5.75% from 6.37% in for the years 2012 and 2011 respectively. Honda’s Operating Profit Margin decreased to 3.24% from 7.06%. (Moyer, Kretlow, McGuigan, 2011)
The Net Profit Margin (profit after taxes/turnover * 100) was 0.92%, 1.32%, 1.51% and 1.71% for the years 2012, 2011, 2010 and 2009 respectively for Toyota. This represents a decrease in net income in the year 2012. Ford experienced more than 10% decrease in net income from 14.84% in 2011 to 4.22% in 2012. While Honda also experienced a 3.21% drop in net income from 4.74% to 1.53% in the year 2012 and 2011 respectively. (Vance, 2003)
Comparisons for Toyota, Ford and Honda for the year 2011.
In the year 2011, the net income of Honda surpassed those of Toyota by 30.8%. Considering that Toyota has slightly more than twice the market capitalization and even turnover of Honda and even the turnover of Toyota is also rated similarly i.e. its twice that of Honda. There are only three possible explanations in this case that is: a.) Honda is highly efficient compared to Toyota b.) Toyota engages in expansion activities or c.) The philanthropic nature of Toyota Motor Corporation in its corporate social responsibilities is having a negative effect in its business operations. These will be clearer in the final conclusion of Toyota Motor Corporation financial evaluation.( Ehrhardt and Brigham, 2008).
Return on Equity (ROE) is arrived at by dividing the profit after taxes and the Shareholders equity were 2.42%, 3.11, 1.65% and 1.81% for the years 2012, 2011, 2010 and 2009 respectively for Toyota Motor Corporation. Honda’s ROE was 3.27%, 7.99%, 4.25% and 5.1% for the years 2012, 2011, 2010 and 2009 while Ford’s ROE was 7.47, 9.4% , 7.05% and 7.9. This implies that Ford has the highest returns on the actual capital employed while Toyota has the lowest returns.
Liquidity stems from the liquid assets and investments that can be quickly converted into cash. The current ratio is arrived at by dividing the current assets and the current liabilities. While quick ratio is calculated by dividing the current assets stock and the current liabilities. Liquidity ratios reveal the company’s readiness and ability to pay its current liabilities. Efficiency ratios are calculated to show how efficient the company is utilizing its resources and assets. For the year 2012 and 2011, current assets/current liabilities equals to 12,321,189,000/11,781,574,000 = 1.05 which is above the normal 1:1 ratio normally recommended the quick ratio is 0.91.Honda’s current ratio and quick ratio for the year 2012 were 1.32 and 1.03. While Ford’s were 1.36 and 1.26 for the same period respectively.
Profitability and Liquidity Ratios for the year 2012.
From the above diagram it’s obvious that Ford has the highest returns on the shareholders funds. While the net assets per share percentages are almost similar between Honda and Toyota while Fords are far below them. The current ratios are all almost similar at an average of slightly over 1.The price earnings ratio is calculated by dividing the market capitalization and the net income. For Toyota it has the highest PE ratio between them. (Vance, 2003).
The efficiency calculations are the inventory turnover = cost of goods sold/ Average inventory. For 2012 these were 14,728,088,000 divided by 1,622,282,000 = 9.1 times for Toyota while Honda and Ford’s were 5.2 and 14.9 times respectively. These ratio the number of times stock is resold to generate sales. A higher ratio means more efficiency in managing the stocks. Ford has the highest turnover in sales i.e. the stock turns 14.9 times in a year.
The Total Assets Turnover = Sales/Average Total Assets. Toyota’s total asset turnover for 2012 was 0.6 for every dollar invested. While Ford and Honda were 0.7 each respectively for the same period. (Khan, 1993). Days in inventory = Days in a year / inventory turnover. For Toyota 365/9.1 = 40.1 while Ford and Honda are 70.2 and 24.5 respectively. Ford had the longest shelf life for its products at 70.1, followed by Toyota at 40.1 days while Honda had the shortest period at 24.5 days. (Mocciaro, Picone and Minà, 2012).
The Gearing ratios are Noncurrent liabilities + loans/ Shareholders funds. Toyotas gearing ratio reduced by slightly more than 9% in the year 2012 i.e. from 122.02 % in 2011 to 113.65% in 2012. These are a remarkable improvement as it reveals that Toyota Motor Corporation reduced some of its liabilities. Ford is highly geared at 736.32% in the year 2012 and the trend is worrying as the ratio indicates there’s in an increment in its debt portfolio of about 1.4% from the previous year while Honda’s gearing ratio stands at 128.9% and 126.1 % respectively.
Toyota Motor Corporation performance is impressive. The financial statement indicates a sustainable trend in the short and long run period. The firm’s gearing ratio is low compared to the other two companies. Though the net income is high compared to its competitors its relative low compared to its market capitalization. Toyota Motor Corporation is behind its competitors who are utilizing their assets and debt portfolio efficiently. (Ross, Westerfield, Bradford, 2010)
Discounted Cash Flow (DCF)
The DCF company analysis is the best way to value a firm. There are two ways. a) Adjusted Present Value (APV) method or b) Weighted Average Cost of Capital (WACC) method. Both methods require the calculations of a firm’s free cash flows and the NPV of these FCFs. The underlying principles behind them are the net present value, Capital Asset pricing Model (CAPM) FCF and the terminal year value. Capital Asset Pricing Model or (CAPM) is a linear model that is used to calculate the expected return on equity. For instance a beta which is 1 means that it varies identically with the market while those with less than 1 it means that the investment is not volatile. A beta that’s more than 1 means that the given investment is more volatile than the entire market. CAPM is calculated as re rf + β (rm – rf)
Re = Discount rate for the firm’s all equity
Rf = Risk free rate
Rm = market return
Β = equity Beta
P V = F V x [ 1 ÷ ( 1 + I ) n ]
| Pv calculations | ||||||
| 2012 | 2011 | 2010 | 2009 | |||
| Ford’s Total Assets | (Millions) | 190554 | 178348 | 164687 | 150390 | |
| Ford’s Total Liabilities | 174285 | 163320 | 165360 | 140460 | ||
| Equity | 16269 | 15028 | -673 | 9930 | ||
| Assuming a rate of 5% | ||||||
| After 5 years Equity will be PV | 12747.19 | 11774.83 | -527.313 | 42991.7 | ||
To conclude, Ford Motor Company has a higher potential of growing into an even bigger company as its efficiency in utilizing its manpower and subsequent good records on growth prospects places it in my number one position on the investment lists. I would certainly become a shareholder of Ford Motor Company at any time in future. With a Beta of 1.57 it’s within the threshold of average risk businesses and the pattern of growth as compared to the rival General Motors and its industry’s peer group is impressive. However, the company should adopt a policy of recycling its profits instead of paying dividends; it should invest more on its research and developments methods to come up with more economical rates for its vehicles which would draw more clients.
References
Ehrhardt, M., Brigham, E. (2008). Corporate Finance: A Focused Approach (3rd Ed.). p. 131.
Levinson, M. (2006. Guide to Financial Markets. London: The Economist
Mocciaro A., Picone P. & Minà (2012). A Bringing Strategy Back into Financial Systems of Performance Measurement: Integrating EVA and PBC, .Business System Review, Vol 1, Issue 1. Pp.85.
Moyer, C., Kretlow, W., McGuigan, J. (2011). Contemporary Financial Management (12 Ed.). Winsted: South-Western Publishing Co.
Ross, S., Westerfield, R, Bradford, D. (2010). Fundamentals of Corporate Finance (9 Ed.). New York: McGraw-Hill.
Vance, D. (2003). Financial analysis and decision making: tools and techniques to solve
Financial problems and make effective business decisions. New York: McGraw-Hill.
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