Disproving the Ford Bears
Feb 23rd 2013 2:30PM
Updated Feb 24th 2013 8:30AM
Even with Ford's surge back to relevance and profitability, a substantial amount of bears remain out there. That's fine. I understand that there are significant risks investing in Ford. That said, I haven't seen too many thorough bear arguments, and some are flat out portrayed incorrectly, such as Ford's debt problem. I decided to collect the bear arguments I hear most often and refute them because I consider the arguments weak, at best. Let's start off with the one I consider most damaging, because of investors' misunderstanding.
Bear case: Ford's debt -- oh, my!
I can't count how many times I hear newer investors who, bless their hearts for trying, see the large debt number on Ford's balance sheet and scream in horror. When investors see Ford's debt-to-equity ratio is 3.8 compared with Toyota, Honda, and General Motors at 0.55, 0.45, and 0.33, respectively, it causes them concern.
I understand that seeing more than $90 billion in debt is a cause from concern, but in Ford's case it isn't. Let me explain. The debt you need to be worried about is automotive debt, which represents only roughly $13 billion of the $90 billion seen on the balance sheet. What's the huge remaining chunk, you ask? It's linked to Ford's financial division. Basically, when they dish out financing, they're able to take on debt, lend it out at a higher interest rate, and make a substantial profit. How much profit, you ask? In 2012 the division reported a profit of $1.7 billion.
To put that in perspective, it almost entirely offset the huge loss Ford recorded in Europe last year. When you hear Ford's debt is a problem, it's actually under control, even though the balance sheet doesn't inform you how. Now, to keep you informed, I need to tell you that Ford's pension obligations are underfunded by roughly $18 billion. That's a different story you can read about here. I have more bear cases to debunk right now.
Bear case: irrational sell off!
As a company, Ford has been performing very well, but the stock price was reluctant to move past $10 for months! Even when the company reports earnings above estimates, Ford's stock still declines from Europe fears. Bears are tired of seeing Ford's stock sell off heavily because of macroeconomic fears, even when the company itself is doing better than ever.
Let me try a therapist take on this for you bears. I feel your frustration, and I understand that you have a right to be upset. I, too, struggle with this irrational behavior toward Ford's stock.
However, don't let it ruin your day. In fact, I've learned to absolutely love this irrational volatility! Why, you ask? Because while the bears complain about irrational selloffs, I profit. When the company is performing well, with improving quality, executing strategies, and growing profit all the while the stock price declines, buy!
I don't suggest trying to time the market. Even an investor who's one part Houdini and one part Buffett would fail at the attempt. When the stock price declines, with so many obvious positives, take the opportunity to add to your position, and when the stock finally improves, you'll be making fantastic gains. Case in point was the recent upswing from $9 to $14, returning excellent gains to investors who bought on the decline. The stock now sits around $12, and if it trends even lower I'll look to add to my position.
Bear case: losing market share
General Motors and Ford lost U.S. market share last year, declining 1.7% and 1.3%, respectively. For GM, its 17.9% share marks its lowest in 50 years. Ouch. Detroit had been consistently losing market share to foreign automakers for years, and many consumers refuse to buy domestic because of the stigma of poor quality. Cue massive panic and sell, sell, sell!
Calm down, and slowly step away from the ledge. Let me share two reasons I'm not worried about the decline in U.S. market share -- yet. For one, the segment with the highest margins and profits is the truck segment, which Ford and rival GM thoroughly dominate. Toyota isn't giving up trying to grab its piece of the pie, but it isn't making any progress. Ford's F-Series sold enough units for a 10.3% increase over 2011, good for a 1.2% market-share increase, though GM actually lost market share, which it plans to gain back with its 2014 model. Ford's F-Series has been the No. 1 selling truck for 36 years, with sales roughly equal to Chevy Silverado and GMC Sierra sales combined. Not too shabby.
Secondly, Ford just launched fresh designs of two best-sellers, the Escape and Fusion. Reviews have been very positive, even after recent recalls. Ford is so confident in the models that it announced increased production of the Fusion at a second factory. Look for these popular vehicles to help Ford reclaim lost market share over the next two years, and look for the F-Series to bring in major profits with its dominant segment position.
A lot of the common bear cases for Ford are either misunderstood or actually give investors a great chance to buy an excellent company at a discount. That doesn't mean there aren't legitimate arguments, especially the underfunded pension or the looming union contracts that will come around in 2015. Those are topics investors need to focus on going forward, not the typical bear argument. For the most part, Ford is an excellent company that should require your attention with the bullish trend in the auto industry.
Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But Ford's stock seems stuck in neutral. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.
The article Disproving the Ford Bears originally appeared on Fool.com.Fool contributor Daniel Miller owns shares of Ford. The Motley Fool recommends 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.
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