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Ford Motor Company was the only one of America's Big Three automakers to turn down government assistance in 2009. The company wanted to maintain its independence, and believed that the strategies that were in place were going to be sufficient to bring about the financial recovery of the firm. In the past couple of years, the company has revamped its product line, cut its expenses, and sought to take advantage of the growth in overseas markets.
What this presentation will show is that for the most part, Ford has experienced something of a renaissance in the past couple of years as the result of these strategies. The analysis will consist of a ratio analysis, an examination of the current economic climate and how that affects Ford's strategy, and a qualitative analysis of both Ford and the auto industry in general. But there is a bigger question that must be answered. Before the changes of the past couple of years, Ford was a mess and its stock was almost worthless. The market has rewarded the company for its recent efforts, however. Given that, is Ford actually a good value? If you are an investor today, do you want to buy Ford? Or is the new, revamped, Ford still a company that faces a lot of challenges that continue to make it unattractive to investors?
Slide 2: The first step to analyzing Ford's financial performance is to conduct a ratio analysis. This includes an analysis of Ford's liquidity. When the company rejected the government bailout, a lot of observers panned the move, noting the company's burn rate and predicting that Ford would need government money sooner or later, so they should probably take it sooner. But this isn't what happened at Ford.
The company's current ratio today is 2.6, compared with 1.7 in2007. The quick ratio is 2.44 today, compared with 1.59 in 2007. The cash ratio today is 0.39, compared with 0.37 in 2007. The current ratio probably looks better than it really is in all three of these years because much of Ford Credit's assets are counted as current while its liabilities are recorded as long-term, but the improvement in the company's liquidity is evident.
Slide 3: The company has also undertaken steps to improve its margins. Big Auto is a high-volume, low-margin business so any margin improvements that the company can make will have a significant impact on the bottom line.
The gross margin in 2010 was 15.6%, up from 6.8% in 2008 and 2.1% in 2006. This reflects superior pricing power over both buyers and suppliers. The operating margin was 4.4%, compared with operating losses in 2008 and 2006. To achieve this improvement, the company cut its selling, general and administrative expense from 16% of revenues in 2008 to just 9.1% of revenues in 2010. In 2010, the company recorded a net margin of 5.1% after taking huge losses in 2008 and 2006. These margin improvements reflect a comprehensive effort on the part of Ford to address areas of weakness across the organization.
Slide 4: The next category of ratios is the operating performance ratios. Ford has recorded strong performance here as well. The company's receivables turnover is 17.7 times, its inventory turnover is 19.9 times and its asset turnover is 0.7 times. The first two figures are well above the industry average. The latter is a low number mostly because of the high fixed costs associated with the automaking business.
Ford's investment return ratios have also demonstrated improvement. The company earned an ROA of 3.7%. This beats the industry average. Return on invested capital is 5.6%. This beats the industry average. Unfortunately, Ford's equity value remains negative, so there was no ROE to record last year. What is interesting is that while Ford is beating the industry average in 2010, it lags the industry in its five-year averages. This reflects the degree to which Ford has improved -- from laggard to leader in just a few years.
Slide 5: Ford's recovery is strong, and has a lot to do with its own internal performance, but the company is still subject to prevailing economic conditions. Ford struggled in 2008 and 2009 when the economy went into a tailspin. Consumers either delayed purchases, bought used cars or bought smaller cars. While Ford has recorded goods results from its Chinese subsidiaries, the company is still dependent on economic conditions in the West -- North America and Europe account for 72% of volume sales.
The economic prognosis is lukewarm. The Congressional Budget Office is predicting 2.7% GDP growth in 2011 and 3.1% growth in 2012, roughly the same as the 2010 level. Unemployment is expected to improve slowly -- 9.2% in 2011 and 8.2% in 2012. There are not any big changes in policy expected from Congress, so these figures should hold up as reasonably accurate. It is worth noting, however, the durable goods orders surged in April by 2.5% - this is the key category of economic activity for automakers because it represents the propensity of Americans to make long-term, big-budget purchases.
Slide 6: The other major economic variable that will impact Ford is the price of gas. There are significant cross-price elasticities between the price of gas and the types of cars that people buy. Ford is dealing with this by introducing hybrid versions of its vehicles. But gas prices are a big concern. The global oil market is resisting attempts by OPEC to bring the price of crude down. Prices aren't just up in the U.S., but in Canada, in Europe…all over the world. For Ford, this could create opportunity.
However, the Fusion Hybrid is a new product, first launched in 2009. Nobody really knows how the demand for this car will be affected by higher fuel prices. We know that demand for Ford trucks will decrease, so unless demand for smaller cars and hybrids can make up for that, higher gas prices might represent a significant challenge for Ford.
Slide 7: The auto industry is massive; some estimates have it at 10% of the global economy. It employs 25 million people around the world. The industry is comprised of a handful of global players such as Ford, Toyota and Volkswagen and a number of regional players as well. As of 2004, the industry remained heavily fragmented. GM had the leading share with 10% of the global market; Toyota was 2nd with 7.9% and Ford was third with 7.7%.
In the key Western markets, the auto industry is mature, and growth comes from technological innovation (new products). Emerging markets are the main source of growth. Since it is often cheaper and more effective to produce cars locally, Ford has facilities in the UK, China, Thailand, Brazil, India and Argentina among others.
Slide 8: Ford's recovery paints a positive picture of the company, but it is still necessary to evaluate Ford objectively with regards to its strengths and weaknesses, and how these stack up to the opportunities and threats within the external environment. Ford has a strong brand that is known around the world, production facilities located in all key markets, a strong presence in the core North American and European markets and a strong distribution network. Ford is a leader in pickup trucks, and some of its recent improvements have positioned it well with respect to its cost structure.
The company still has a number of weaknesses, most of them financial. The company has massive pension obligations that continue to go unfunded. Ford does not intend to fund these obligations in 2011, according to its latest annual report. The company may face a strike in the UK over the issue, and until the pensions issue is resolved it will continue to cast a cloud over the company's finances. For still has lingering reputation issues as well, after decades of low-quality vehicles and ethical lapses.
Slide 9: The primary source of opportunity for Ford lies in emerging markets. India is set to become the world's third-largest auto market in the next ten years. Sales in the Asia-Pacific region and Africa are expected to contribute 70% of Ford's growth in that period. This growth will result in an increase in gas prices, which in turn will fuel strong growth in hybrid cars.
There are a number of threats, however. These include the competition -- many competitors have stronger products, better finances and superior distribution networks. All major automakers are targeting the same growth markets that Ford has its eye on, so there will be no free and easy path to rapid growth. The state of the global economy is also a major risk for Ford. Is China's economy a house of cards or can it continue to grow at a breakneck pace? Is growth in places like India and Brazil truly stable? Ford also must consider other risks, such as increasing health care costs, which will further weaken the company's ability to meet its pension obligations.
Slide 10: With all of this in mind, we can make an analysis of…[continue]
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