Ford Bull's Pen
by Paul Larson ([email protected])

I have an admission to make. My argument for Ford is ridiculously simple, but that's because reaching an opinion on Ford is, too. In short, the stock is trading on the cheap when looking at any number of common valuation techniques.

Before popping the hood and trying to measure up the financial engine that is driving the stock, let's look at some other sorted issues. First up is the overall economic situation in the nation. To be sure, Ford's profits are heavily dependent on a healthy economy. While the economies overseas may have hit a pothole and are now running with one flat tire, the American economy is still hitting on all eight cylinders. As a consumer cyclical company, this is good news for Ford. Sure, Ford has exposure to the international market, but the lion's share of the company's business is in the good ole USA.

More importantly, interest rates are the lowest they have been in many moons. Low interest rates benefit all capital-goods suppliers because it makes borrowing to finance purchases that much less of an expensive proposition. And since Ford is heavily involved in the finance industry, too, the company stands to especially gain from low rates.

Changing gears, Ford, like fellow automaker Chrysler, is not listed in the Dow Jones Industrials even though it is considerably larger than some of those listed in the index. For instance, Ford has a market capitalization of over $55 billion (1.211 billion shares outstanding X $45) and sales of $150 billion. On the other hand, Union Carbide <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %> has only $5.5 billion in market capitalization (135 million shares x $40.5) and $6 billion in revenues. Plainly, Ford is significantly bigger than Union Carbide, yet Carbide is the one listed in the Dow.

I know you may be wondering what road I'm headed down with this. My point is that if Ford were listed on the Dow, it would be popping up as a stock to buy in just about any "Dogs of the Dow" type listing, such as the Foolish Four. This is due to both the stock's low price combined with its high dividend yield. Huge companies like this tend to outperform the market over time, even though the bearish arguments tend to bark the loudest when these companies are among the doggies. Quite frankly, it's contrarian theory at its simplest best.

Let's now get to those valuations I alluded to earlier. At the time this was written, the stock was yielding 3.7% where the rest of the market as measured by the S&P 500 was yielding a mere 1.6%. In this day and age, capital gains may be preferred over dividend checks, but having those regular cash payments from the company being paid to investors tends to put a bit of a floor underneath the stock.

While the dividend yield is much higher than the rest of the market, the company's P/E ratio is also impressively more attractive than the average stock in the S&P 500. While the S&P's current multiple is somewhere near 27x trailing profits, Ford trades near 8x trailing earnings. That's right, Ford would need to triple from these levels to even come close to achieving an average market multiple. Though I'm supposed to be arguing the bull side here, I will concede that Ford will trade nowhere near 27x earnings in even the most frenzied and speculative bull market. Nevertheless, having a company trading far below the market's average P/E ratio tends to be a buy signal.

Not only is the company trading below the market multiple of earnings, Ford is also trading in the single digits when it comes to multiples of forward earnings estimates. Expected to earn over five bucks per share next year, the forward P/E ratio is less than 10. Considering the S&P 500 is trading at nearly double this multiple of forward profits, even the most ardent bear can call this expensive.

So we have a high relative dividend yield and a low P/E ratio on both trailing and forward earnings, yet another common and simple valuation metric shows Ford as hardly expensive. The price to book ratio for Ford is a mere 2.2x while the average stock in the S&P is trading, again, at significantly higher levels at near 7.0x book. Mark yet another basic stock valuing tool as showing Ford undervalued.

I'm sure the grizzly bear Rick will try to complicate and obfuscate this Duel with as many details as possible. Of course, a heavy dosage of bad puns can be expected. Don't be fooled. People will always need cars, and Ford isn't going out of business. More importantly, a number of basic valuation techniques are signaling the green light for the company's stock. Have you bought Ford lately?

Next: The Bear Argument