Most traders wouldn’t contact an auto inventory with a 10-foot pole lately.
After greater than a 12 months of recession fears and sky-high rates of interest, many automobile corporations have seen their earnings careen right into a ditch.
So it’s no shock that Ford (NYSE: F) has seen its inventory sputter. It’s fallen greater than 40% from its January 2022 excessive.
However whereas some might even see a clunker destined for the scrap heap, a deeper look below Ford’s hood reveals an organization which may be underappreciated by the market.
The auto big’s just lately reported This autumn and full-year 2023 outcomes present some encouraging indicators {that a} turnaround may very well be taking maintain.
Income revved 11% greater to $176 billion for the complete 12 months, marking the second straight 12 months of double-digit top-line development. And internet earnings surged from a $2 billion loss to a $4.3 billion revenue, pushed by continued energy within the firm’s Ford Professional industrial car and providers enterprise and its core Ford Blue inside combustion engine operations.
And crucially, adjusted free money movement jumped to $6.8 billion, nicely above the highest finish of Ford’s steering of $5.0 billion to $5.5 billion.
In This autumn particularly, the underlying enterprise remained resilient regardless of ongoing provide chain snarls and the expensive United Auto Staff strike, which dinged EBIT (earnings earlier than curiosity and taxes) by a hefty $1.7 billion.
Once we strip out these transitory impacts, earnings for Ford’s core auto enterprise truly improved 12 months over 12 months.
The corporate’s stability sheet additionally appears to be like sturdy, with over $46 billion in liquidity (together with practically $29 billion in money) offering ample cushion.
However what actually caught my eye is how Ford stacks up on two key valuation metrics I take advantage of in my Worth Meter system.
The primary is enterprise worth to internet property (EV/NAV), which appears to be like on the complete worth of an organization’s enterprise relative to the web property on its stability sheet. Consider it as an acquisition a number of – how a lot it might value to purchase up all of Ford’s manufacturing crops, stock, money and different property, in addition to to tackle its liabilities.
Ford trades at an EV/NAV of simply 0.92, a fraction of the common of 6.1 amongst eligible corporations. In different phrases, the market is actually saying you could possibly purchase up the whole lot of Ford’s asset base at a reduction to its said guide worth.
Solely 12% of eligible corporations have an EV/NAV beneath 1, so Ford’s valuation appears overly pessimistic for an organization that’s churning out billions in earnings.
The second metric is free money movement to internet property, which appears to be like at how a lot money an organization generates relative to the web property it has to work with.
Ford’s common quarterly free money movement over the previous 12 months amounted to only 3.9% of its internet property, about one-fourth of the common of 15.5% amongst eligible corporations.
That’s not as excessive as I’d like, however due to the corporate’s extraordinarily low EV/NAV ratio, the inventory nonetheless appears a bit too discounted to me.
To be clear, Ford faces loads of potholes forward. Its electrical car (EV) enterprise continues to rack up losses, and the corporate is having to rethink its all-in EV spending plans in mild of Tesla’s relentless worth cuts. Plus, any important downturn within the financial system would certainly dent demand for its worthwhile vans and SUVs.
However with the corporate nonetheless producing strong free money movement and its enterprise worth now beneath the worth of its internet property, the risk-reward ratio appears to be like considerably skewed to the upside for affected person traders.
Whereas Ford might not be firing on all cylinders simply but, there seems to be some fuel left within the tank.
The Worth Meter charges Ford inventory as “Barely Undervalued.”
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