In this paper, we are going to discuss the following items related to our 1st Assignment: Ford Motor Company. 1. Based on the most recent quarter pre-tax operating profit project the profit for the next four (4) quarters assuming that the U.S economy stays the same as today, declines into a recession and modestly improves. Explain the assumptions made to support your calculations. 2. Discuss three (3) key financial ratios that you would analyze to determine whether or not Ford would be a wise investment opportunity. Explain your rationale.
3. Based on your analysis of the key ratios, describe the strategies you would recommend to Ford’s management team to improve its financial performance. Explain your rationale. 4. Evaluate how the refusal of the federal government’s “Bail Out” fund may have impacted Ford’s financial performance negatively and positively.
1. An icon of U.S. manufacturing, Ford Motor Company has been one of the most prominent automobile producers in the world for almost 100 years. Founded by Henry Ford in 1903, his vision was the production of cars that were affordable to the masses. Today, Ford has been losing money, particularly in its North American operations. Ford produces more vehicles than it can sell and does so under very difficult personnel conditions.
The history of the company and its relations with the United Auto Workers labor union has left it with extraordinary long-term expenses in an environment of increasing competition from younger, more focused car companies (Cengage Learning).
In this section, we are going to project Ford’s Pre-Tax profits for the four quarters of 2013 based on the last quarter Pre-Tax profit of 2012 and three assumptions of an upcoming, normal, good economy or a recession.
All the following calculations regarding the three assumptions arebased on the following 2012 consolidated income of operations (Ford Motor Company).
|In Millions of USD (except for per |3 months ending |3 months ending |3 months ending |3 months ending | |share items) |2012-12-31 |2012-09-30 |2012-06-30 |2012-03-31 | |Total Revenue |36,424.00 |32,172.00 |33,211.00 |32,445.00 | |Cost of Revenue, Total |32,139.00 |27,307.00 |28,567.00 |27,680.00 | |Gross Profit |4,285.00 |4,865.00 |4,644.00 |4,765.00 | |Selling/General/Admin. Expenses, Total |3,470.00 |2,966.00 |2,959.00 |2,873.00 | |Unusual Expense (Income) |2 |3 |6 |3 | |Total Operating Expense |35,611.00 |30,276.00 |31,532.00 |30,556.00 | | | | | | | |Income Before Tax |1,841.00 |2,246.00 |1,595.00 |2,038.00 |
A. Quarterly financial projections under Normal economy
• Revenue for Q1 and Q2 is based on average estimated revenue provided by 17 financial analysts. For Q3 and Q4 revenue is assumed to increase by 1% each quarter based on the trends of revenue of Q1 and Q2.
• Cost of revenue for the year 2012 on a quarterly basis is showing an increasing trend. Cost of revenue as percentage of sales in the each of the 4 estimated quarters of 2013 is assumed to be same as previous year.
• Selling and administrative expense for all the quarters of 2012 are in a range as a percentage of revenue. Selling and administrative expenses in each of the 4 quarters of 2013 have been computed based on the average of Q1, Q2, Q3 and Q4 (9% of the revenue).
Below are the quarterly financial projections under Normal Economy for all the 4 quarters of 2013:
| | | | | | | | | | | | | | | | | | | | | |Net Profit Margin = | $ | $ 6,561,000.00 | $ | $ | | |2,717,000.00 | |20,213,000.00 |5,665.00 | |Net Income | $ | $ 128,954,000.00 | $ | $ | | |116,283,000.00 | |136,264,000.00 |134,252.00 | |Total Revenue | | | | | | |2% |5% |15% |4% | |Return on Equity Ratio = | $ | $ 6,561,000.00 | $ | $ | | |2,717,000.00 | |20,213,000.00 |5,665,000.00 | |Net Income | $ | $ (673,000.00) | $ | $ | | |(7,820,000.00) | |15,028,000.00 |15,990,000.00 | |Shareholder’s Equity |
| | | | | |-35% |-975% |135% |35% | |Debt to Equity Ratio = | $ | $ 165,360,000.00 | $ | $ | | |199,860,000.00 | |163,320,000.00 |174,560,000.00 | |Total Liabilities | $ | $ (673,000.00) | $ | $ | | |(7,820,000.00) | |15,028,000.00 |15,990,000.00 | |Shareholder’s Equity | | | | | | |-25.56 |-245.71 |10.87 |10.92 |
• The net profit margin of the company is on the increasing trend, which is a good sign for the company and reflecting positive future prospects.
• The return on equity of the company has shown a tremendous improvement over the last four years from being negative to a good return. This is very encouraging for the shareholders of the company.
• The debt to Equity ratio of the company has also improved over the last four years, which is a good sign for the company and shows that the company is well balanced, in terms of leveraging.
In addition to the ratios results showing above, the stock price forecast by 17 analysts offering 12-month price forecasts for Ford Motor Co. have a median target of 15.00, with a high estimate of 20.00 and a low estimate of 11.00. The median estimate represents a +16.01% increase from the last price of 12.93. The current consensus among 22 polled investment analysts is to buy stock in Ford Motor Co. This rating has held steady since April, when it was unchanged from a buy rating (CNN Money).
Based on the information above, I think investing in Ford’s Stock is a wise investment opportunity.
2. Based on the facts discussed above, some of the strategies that the company should adopt or follow for the improvement of its financial performance are:
• The company needs to concentrate on its cost of sales as a percentage of sales are on a higher side. On reduction of cost of sales the gross margin of the company will be improved, which in turn will impact the net income of the company.
• Ford also needs to reduce its debt, which in turn will reduce the interest burden from the company and the debt to Equity ratio of the company will improve. This will infuse confidence among the investors.
• Bar the payment of dividends and excessive executive compensation, including bonuses and golden parachutes by companies receiving taxpayer assistance.
• Demonstrate the auto companies’ ability to achieve the fuel efficiency requirements set forth in the Energy Independence and Security Act of 2007, and become a long-term global leader in the production of energy-efficient advanced technology vehicles.
3. In December 2008, Ford along with two other Major auto industries asked the Federal Government for a bailout to avoid bankruptcy as the fall of the companies would mean millions of layoffs, pushing the US economy in further recession. The federal government in turn provided funds to the companies other than Ford for operating cash.
Ford Company had emerged as the sole American auto company who was in a position to survive the steepest sales decline in years without having received bailout from the government. The non-receipt of bailout from the government and the company’s survival improved the reputation of the company and helped it win new customers.
• Ford was able to take advantage of the economic climate, which was meant for bankrupt US auto companies. Whereas Ford was not operating neither under government influence, nor bankrupt.
• Despite the refusal of government bailout funding, Ford had come even stronger and as Lean for its bankrupt competitors
• Ford was able to Cut dent, renegotiate Healthcare and preserve valuable tax assets.
• Ford was able to transform itself into a highly levered bet on the recovery of US light vehicles.
Based on the above findings it can be concluded that the government’s refusal of “Bailout”, impacted Ford positively (Amdeo, 2012).
Ford Motor Company. Consolidated Statements Of Operations. Retrieved April, 2013 from: https://www.google.com/finance?fstype=ii&q=NYSE:F CNN Money: Ford Motor Company. Earnings and Sales Forecasts. Retrieved April, 2013 from: http://money.cnn.com/quote/forecast/forecast.html?symb=F
Ford Motor Balance Sheet. Retrieved April, 2013 from:
Amdeo, A. (2012, March 28). The auto industry bailout. Retrieved April, 2013 from: http://useconomy.about.com/od/criticalssues/a/auto_bailout.htm
Ford Co. Ford motor company business plan submitted to the senate banking committee. Retrieved April, 2013 from: http://media.ford.com/images/10031/Ford_Motor_Company_Business_Plan.pdf
Cengage Learning. Chapter 5—Planning and Decision Making, Management. Retrieved April, 2013 from: