The Ford Motor Company (NYSE: F) is an American multinational automaker based in Dearborn, Michigan, a suburb of Detroit. The automaker was founded by Henry Ford and incorporated on June 16, 1903. In addition to the Ford and Lincoln brands, Ford also owns a small stake in Mazda in Japan and Aston Martin in the UK. Ford’s former UK subsidiaries Jaguar and Land Rover were sold to Tata Motors of India in March 2008. In 2010 Ford sold Volvo to Geely Automobile. Ford discontinued the Mercury brand at the end of 2010.
Ford introduced methods for large-scale manufacturing of cars and large-scale management of an industrial workforce using elaborately engineered manufacturing sequences typified by moving assembly lines. Henry Ford’s methods came to be known around the world as Fordism by 1914. Ford is the second largest automaker in the U. S. and the fifth-largest in the world based on annual vehicle sales, after having been passed by the Hyundai Kia Automotive Group in 2010. At the end of 2010, Ford was the fifth largest automaker in Europe.
Ford is the eighth-ranked overall American-based company in the 2010 Fortune 500 list, based on global revenues in 2009 of $118. 3 billion. In 2008, Ford produced 5. 532 million automobiles and employed about 213,000 employees at around 90 plants and facilities worldwide. During the automotive crisis, Ford’s worldwide unit volume dropped to 4. 817 million in 2009. Despite the adverse conditions, Ford ended 2009 with a net profit of $2. 7 billion. Starting in 2007, Ford received more initial quality survey awards from J.
D. Power and Associates than any other automaker. Five of Ford’s vehicles ranked at the top of their categories and fourteen vehicles ranked in the top three. Initially, Ford Motor Company models sold outside the U. S. were essentially versions of those sold on the home market, but later on, models specific to Europe were developed and sold. Attempts to globalize the model line have often failed, with Europe’s Ford Mondeo selling poorly in the United States as the Ford Contour, while U. S.
models such as the Ford Taurus have fared poorly in Japan and Australia, even when produced in right hand drive. The small European model Ka, a hit in its home market, did not catch on in Japan, as it was not available as an automatic. The Mondeo was dropped by Ford Australia, because the segment of the market in which it competes had been in steady decline, with buyers preferring the larger local model, the Falcon. One recent exception is the European model of the Focus, which has sold strongly on both sides of the Atlantic.
By 2005, corporate bond rating agencies had downgraded the bonds of both Ford and GM to junk status, citing high U. S. health care costs for an aging workforce, soaring gasoline prices, eroding market share, and dependence on declining SUV sales for revenues. Profit margins decreased on large vehicles due to increased “incentives” (in the form of rebates or low interest financing) to offset declining demand.
In the face of demand for higher fuel efficiency and falling sales of minivans, Ford moved to introduce a range of new vehicles, including “Crossover SUVs” built on unibody car platforms, rather than more body-on-frame chassis. In developing the hybrid electric powertrain technologies for the Ford Escape Hybrid SUV, Ford licensed similar Toyota hybrid technologies to avoid patent infringements. Ford announced that it will team up with electricity supply company Southern California Edison (SCE) to examine the future of plug-in hybrids in terms of how home and vehicle energy systems will work with the electrical grid.
Under the multi-million-dollar, multi-year project, Ford will convert a demonstration fleet of Ford Escape Hybrids into plug-in hybrids, and SCE will evaluate how the vehicles might interact with the home and the utility’s electrical grid. Some of the vehicles will be evaluated “in typical customer settings,” according to Ford. In December 2006, the company raised its borrowing capacity to about $25 billion, placing substantially all corporate assets as collateral to secure the line of credit. Chairman Bill Ford has stated that “bankruptcy is not an option”.
In order to control its skyrocketing labor costs (the most expensive in the world), the company and the United Auto Workers, representing approximately 46,000 hourly workers in North America, agreed to a historic contract settlement in November 2007 giving the company a substantial break in terms of its ongoing retiree health care costs and other economic issues. The agreement includes the establishment of a company-funded, independently run Voluntary Employee Beneficiary Association (VEBA) trust to shift the burden of retiree health care from the company’s books, thereby improving its balance sheet.
This arrangement took effect on January 1, 2010. As a sign of its currently strong cash position, Ford contributed its entire current liability (estimated at approximately US$5. 5 Billion as of December 31, 2009) to the VEBA in cash, and also pre-paid US$500 Million of its future liabilities to the fund. The agreement also gives hourly workers the job security they were seeking by having the company commit to substantial investments in most of its factories. The automaker reported the largest annual loss in company history in 2006 of $12. 7 billion, and estimated that it would not return to profitability until 2009.
However, Ford surprised Wall Street in the second quarter of 2007 by posting a $750 million profit. Despite the gains, the company finished the year with a $2. 7 billion loss, largely attributed to finance restructuring at Volvo. On June 2, 2008, Ford sold its Jaguar and Land Rover operations to Tata Motors for $2. 3 billion. During November 2008, Ford, together with Chrysler and General Motors, sought financial aid at Congressional hearings in Washington D. C. in the face of worsening conditions caused by the automotive industry crisis. The three companies presented action plans for the sustainability of the industry.
The Detroit based automakers were unsuccessful at obtaining assistance through Congressional legislation. GM and Chrysler later received assistance through the Executive Branch from the T. A. R. P. funding provisions. On December 19, the cost of credit default swaps to insure the debt of Ford was 68 percent the sum insured for five years in addition to annual payments of 5 percent. That means it costs $6. 8 million paid upfront to insure $10 million in debt, in addition to payments of $500,000 per year. In January 2009, Ford announced a $14. 6 billion loss in the preceding year, making 2008 its worst year in history.
Still, the company claimed to have sufficient liquidity to fund its business plans and thus, did not ask for government aid. Through April 2009, Ford’s strategy of debt for equity exchanges, erased $9. 9 B in liabilities (28% of its total), in order to leverage its cash position. These actions yielded Ford a $2. 7 billion profit in fiscal year 2009, the company’s first full-year profit in four years. A company creates wealth for its long-term shareholders in 2 main ways – through dividend payments and through the accumulation of retained earnings.
This graph shows the accumulation of per-share equity of long-term shareholders (green bars), which consists of the retained earnings plus all capital invested in the company, and the cumulative dividends the company has paid over time per share of its stock (blue bars). Return on equity is a key metric of financial performance, indicating a company’s ability to generate earnings using shareholder capital. Over time, ROE is one of the major determinants of the rate at which a company creates shareholder wealth.
The average ROE for large U. S.companies is 12%, and many investors use it as a threshold for attractive investments. Companies can boost ROE by increasing leverage, which reduces the safety of the investment. Therefore, it is useful to look at the return on assets (ROA), which measures a company’s earning power regardless of its capital structure. A widening gap between ROE and ROA may be a warning sign that should be thoroughly investigated. Earnings per share is a popular metric used to value a company (using P/E ratio); growth in EPS is often used to judge company growth potential.
However, many investors believe that EPS is an inferior metric to ROE, because it ignores the amount of capital the company used to generate earnings. Balance sheets of many companies contain intangible assets such as goodwill, trademarks, patents, etc. Many investors consider intangibles more difficult to value than physical assets. If intangible assets had been valued incorrectly, they must be impaired, resulting in a loss charged against shareholder equity. This chart demonstrates the potential loss to shareholder equity from such impairments.
Companies often use debt financing to increase their return on equity. However, as the amount of debt financing increases relative to the amount of equity financing, the company becomes more sensitive to down turns and other negative events. As a result, many investors use the ratio of debt to equity as a measure of a company’s financial risk, and avoid companies that have this ratio above 1. This chart shows shareholder equity as a percentage of total assets, allowing investors to judge the overall leverage. Companies with a higher proportion of equity can be viewed as safer investments.
This metric is particularly important for highly leveraged institutions, such as banks, where it must be at least 4% according to government regulations. Many investors use the P/B ratio as a quick way of judging company valuation. Value investors – followers of Graham and Dodd – specifically seek out companies with low P/B ratios. However, investors should be careful not to make investment decisions on this metric alone, without considering a company’s earning and growth potential, since a low P/B ratio can be a sign of a bleak future for the business.
P/E ratio is a popular way of making a quick judgment of a company valuation. Value investors – followers of Graham and Dodd – often seek solid companies with low P/E ratios as investment opportunities. However, P/E ratio represents an oversimplified approach to business valuation, and can often lead to incorrect investment decisions. The Ford Motor Company has had many disappointment in the past several years, but has slowly gained more confidence by introducing newer models and increasing technology.
The company still has many problems that need to be worked out. The total liabilities are extremely high, resulting in low working capital. Accounts receivable are also remaining unpaid for far too long. Overall, the company seems to be improving from years past, but still has a long way to go. Ford is operating “extremely” well comparing to two other main American car manufactures – GM and Chrysler Group – which in global crisis times had to apply for Chapter 11, and went bankrupt. By agreeing to loan General Motors and Chrysler a combined $17.
4 billion, the American government keeped the two companies on life support during the worst car-industry downturn in decades. But the deal also gave the two companies a tight, three-month window to prove how they’ll get competitive, become profitable, and pay back taxpayer largesse. And that never happened. GM has been sold to the US government and Chrysler Group partially to Italian carmaker Fiat and to US and Canadian government. Only Ford, thanks to smart marketing, and flexible car portfolio avoid bankruptcy and loans.
American cars had a bad stigma attached to them, they were big, slow, horrible on gas, and not very good quality. Ford introduced smaller and more fuel efficient cars (borrowed from European division Fiesta and Focus) with much better assembly quality. The company replied also for the fashion for environmently-friendly cars (like hybrids or electric cars), lounching Fusion and Escape hybrid models. The Ford Motor Company has made many achievements during 2009, and plans to continue into 2010. In 2009, Ford reduced it’s costs by almost $900 million, and improved performance.
They also improved per-unit revenue of $745 in North America. The new Ford F-series, and the Ford Escape set sales records in 2009, and will hopefully have continued success in 2010. Ford is also optimistic about it’s new Ford Escape and Fusion Hybrid model. This model (Fusion) was named “North American Truck of the Year,” and appeals to all types of people. Overall, Ford plans to continue to improve its performance for 2010. Within the year 2009, the net income for the Ford Company has increased seven fold. Both the gross profit, and income from operations have increased greatly as well.
While the total assets in 2009, have decreased, the constant capital has increased and the Stockholders equity has decreased. The biggest change is the decrease in liabilities in 2009. The Ford Automotive segment registered a 5% decline in revenues to $30. 3 billion during the quarter. Excluding sales of Volvo cars in 2009, revenues went up 8%. The pre-tax operating profit decreased $173 million to $741 million during the quarter, driven by higher structural and commodity costs as well as unfavorable volume and mix.. The structural costs were higher in order to support volume growth and product development plans of the company.
In North America, revenues escalated 10% to $17. 2 billion. The region recorded a rise in pre-tax operating profit to $670 million from $611 million a year ago, reflecting favorable net pricing, higher industry volume, favorable mix, market share improvements and favorable exchange rate movements. These were offset partially by the absence of stock increases similar to that of prior-year, higher structural costs to support product launches and growth, higher commodity costs and costs associated with the recently announced Windstar minivan recalls.
For full year 2010, Ford boasted of a profit of $7. 58 billion or $1. 91 per share (before special items), which is a record in more than 10 years led by strong performance in North America, reflecting favorable volume, mix and pricing, as well as better performance by Ford Credit. It compared with a profit of $19 million or one cent per share in 2009. However, the company’s profit failed to meet the Zacks Consensus Estimate of $2. 09 per share. Ford Automotive recorded a $7. 2 billion improvement in pre-tax operating profit to $5. 3 billion, driven by strong performance in North America.
Ford had cash and marketable securities of $20. 5 billion as of December 31, 2010, a decline from $24. 9 billion a year ago. Total Automotive debt stood at $19. 1 billion as of the above date. In 2010, the company’s Automotive operating-related cash flow was $5. 2 billion to $4. 4 billion, driven by higher profit. Capital expenditures fell $100 million to $3. 9 billion in the same year. n 2010, Ford continues to expect its structural costs in the Automotive division to be higher on a year-over-year basis in order to support higher production and new investments.
The company also anticipates commodity costs to be higher on the back of magnified global demand. Capital expenditures is expected in the range of $5 billion to $5. 5 billion as the company continues to invest in its product and growth plans. We appreciate Ford’s product plans and debt reduction strategy. The benefits from these strategies have already been reflected in the company’s results. However, there are concerns about the company’s higher structural and commodity costs. ana