Has Ford Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Ford fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Ford.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

(1.3%)

Fail

 

1-year revenue growth > 12%

(4.7%)

Fail

Margins

Gross margin > 35%

14.1%

Fail

 

Net margin > 15%

13.4%

Fail

Balance sheet

Debt to equity < 50%

525.7%

Fail

 

Current ratio > 1.3

1.68

Pass

Opportunities

Return on equity > 15%

140.2%

Pass

Valuation

Normalized P/E < 20

10.56

Pass

Dividends

Current yield > 2%

3.1%

Pass

 

5-year dividend growth > 10%

NM

NM

       
 

Total score

 

4 out of 9

Source: S&P Capital IQ. NM = not meaningful; Ford restored its dividend in Jan. 2012. Total score = number of passes.

Since we looked at Ford last year, the company doubled its score, more than making back the single point it dropped from 2011 to 2012. A big boost in the dividend and an improving balance sheet helped boost the company's score, but the stock has had to rally sharply in the past few months just to eke out a 5% gain over the past year.

The key to understanding Ford's success is to realize that unlike competitors Chrysler and General Motors , Ford never declared bankruptcy, yet it managed to restructure itself more successfully. With huge production levels at its U.S. factories and a wide range of globally viable vehicles available, Ford has turned things around at home impressively. Japanese rivals Toyota and Honda have taken notice, even as they've managed to bounce back from the Japanese earthquake and tsunami in early 2011 to regain lost ground in the U.S. market.

Moreover, China has been a big winner for Ford. The company saw sales nearly double in the emerging-market nation in January, with popular vehicles like its two Focus models and its Escape-clone Kuga SUV doing quite well there. Ford hasn't done quite as well in India, where Tata Motors still has a big edge and has captured the low-end market, but it has planted the seeds to benefit as that market matures.

In its most recent quarterly report, Ford's results showed the differences in the regions that the automaker serves. The company posted a pre-tax profit of $1.7 billion for the quarter, but most of that came from strength in North America. For the full year, Ford lost $1.75 billion in 2012 and expects to lose another $2 billion there this year. But if the One Ford plan does as well in Europe as it did elsewhere, then Ford may well fare much better than GM in Europe in the long run.

For Ford to keep improving, it needs to work on finding ways to get revenue growth moving in the right direction. That probably means jump-starting Europe, and while that may take a while, it's the key toward getting Ford closer to perfection in the years ahead.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Learn more about Ford's prospects by reading the Fool's premium research report on the automaker. Inside, one of our top stock analysts takes a look at the company inside and out, assessing whether Ford is a buy right now and giving his reasons why. Don't miss out; click here to get instant access to this premium report.

Click here to add Ford to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The article Has Ford Become the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum