hi I'm Jimmy in this video we're looking at the Ford Motor Company ticker symbol
F this company was a recommendation from one of our community members and then
what we do is we do a poll the community votes and Ford got the most votes so
that's the next company that we analyzed okay now full disclosure I actually own
one share of Ford now I didn't buy this share I actually received it from Robinhood
when a friend signed up for Robinhood using the affiliate link that I
have so if you're looking for an online broker I'll leave a link to robin hood
below and if you use it then i get a share of some stock and you get a share
of some stock although we don't know which one okay so first we're gonna look
at the basics of Ford's business and I'm gonna try to value Ford stock using a
discounted free cash flow valuation method okay so this is for its revenue
going back to 2011 and as we could see they break their revenue into two main
categories first is Ford credit Ford credit does some financing for financing
and Leasing mostly to help finance their automobiles although they do have some
financing activities for their automotive dealers and then the other
segment their largest segment is their automotive business which clearly
dominates their overall revenue this segment includes the sale of Ford and
Lincoln vehicles plus any service parts the segment also includes anything tied
to their electric vehicles program okay now if we dive in and look a bit closer
at their automotive segment in 2019 well we can see how they break that down it
looks like they made about 68 percent of their revenue in North America then your
picanha for another 20 percent or so and then from there from there each region
got gradually smaller now always switched back to Ford's annual revenue
well growth for Ford's revenue was about a hundred thirty six billion dollars
back in 2011 and about a hundred and fifty six billion dollars in 2019 and
here's one of my issues with Ford in general over the past eight years that
was growth of about fourteen percent not fourteen percent a year fourteen percent
total and clearly that's a small amount of growth we can't forget that this
fourteen percent growth occurred in the middle of one of the best economic bull
runs in history and doesn't include anything tied to the coronavirus now
when we switch over their net income well here we can see the profits have
all over the place since 2011 and I'm sure we can all see that Ford's profit
margins have been quite small they put up about four and a half billion in
profits during 2019 and that's all in about one hundred and fifty six billion
dollars in revenue so their profit margins are about three percent which is
quite small although it's not too far away from some competitors in the
industry Fiat Chrysler and General Motors both have margins in the four
percent range so Florida's on the low end but it's all like they're way lower
than everybody else now this brings us to 2020 in the coronavirus so clearly
the coronavirus has crushed auto sales in general and here when we look at us
auto sales we can see that auto sales have dropped off a cliff once the
coronavirus hit the world now as we could imagine this pullback in auto
sales is going to crush 2020 revenue not just for Ford but for all car
manufacturers and we know that back in May of 2020 Ford halted production in
two of the u.s. plants as a few of their workers tested positive for kovat and
then in recent weeks Ford started turning out vehicles once again which is
in line with the fact that at least some parts of the United States are opening
up again and I'm sure we'll see at least some uptick in the number of cars being
sold ok now this brings us to the fair value of Ford silk so right now Ford has
a price to earnings ratio of about 11x based on their past 12 months of
earnings per share and at first glance this might sound like a pretty good deal
given that the average for the S&P 500 is currently 21x but I think we should
be very careful about using price to earnings right now now just for Ford or
automobile stocks but really for any company since the coronavirus has
affected so many companies in so many different industries almost any
company's earnings per share numbers are going to be on the low end and that will
likely make many companies look overvalued because their recent earnings
have pulled back so I'm not a big fan of price to earnings ratio during this time
period I much prefer discounted free cash flow
especially for a mature company like Ford so one of the reasons I prefer to
use discount a free cash flow is that near-term estimates are far less
sensitive compared the longer-term estimates let me
illustrate what I mean but before I do if you're curious how to do this
calculation I actually got I did a video on a discount free cash flow guide I
created an Excel template if you're curious if you want to see how to do
this there's a link in the description below and by the way I got these free
cash flow estimates from analysts estimates that I was able to find okay
just taking just twenty twenty-one as an example right now we see about a
negative 1 billion dollar estimate and discounting that back to today we see
that will give us a negative nine hundred nine million dollar impact but
just to illustrate what if we would have shift that negative 1 billion dollar
estimate to a positive one billion dollar estimate which would be a two
billion dollar swing in our estimates well obviously our nine nine hundred
nine million dollars becomes a positive number and we can see that the fair
value per share has stayed about the same and that's because at the end of
the day most of the value from a discounted cash flow calculation is
going to come from the terminal value which in our case is tied to our 2023
estimates so we discount those back by a required rate of return we use seven and
a half percent for that and then our growth rate or perpetual growth rate of
two and a half percent we discount that two back to today that gives us our
total company value those are the most important numbers in this whole
calculation so our question is with these estimates at our 2023 numbers we
got about a six billion dollar estimate are they reasonable estimates well if we
were to switch over to a chart of free cash flow going back the past few years
we can see that the six billion dollar free cash flow for the 2023 number seems
reasonable possibly even a bit on the conservative side if we think that the
recent years are any sign of what's to come for Ford in the future okay so
overall I'm happy with our estimates and we jump back to our calculation of fair
value well we can see that this calculation gives us a fair value of
about twenty four dollars per share but this is a fair value of the entire
company we should really count for Ford's debt since they have a ton of it
so as of the end of the first quarter of 2024 it had almost one hundred and
seventy billion dollars in debt and they had about forty six billion dollars in
cash as well some we can't for those two well
this is what our new calculation looks like and we can see that we end up with
a fair value of Ford stock of about negative $8 per share
now since the stock cannot actually go negative it would seem that because of
all their debt their stock could very well be overpriced right now at the
current price of about $6 per share now not truly suggesting that this company
isn't worth anything clearly they have a brand and that's gonna be worth
something they also seem to have the backing of the US government so that
should help them and maybe they end up cleaning up some of their debt and
increasing their free cash flow at a faster rate than we've predicted here so
may very well be worth more than this but for me since I do own one share well
I'm probably gonna sell that share at some point in the near future now that
I've more thoroughly researched the company and I'll see if I could find a
company that I feel a bit more confident about over the long run now since I'm
not too keen on Ford stock at this point on if you're curious about a few
companies that could be interesting for us to do a deeper dive on I did a video
just recently of the three best and the three worst performing stocks during the
coronavirus stock market crash there could be some gems hidden in there
if you're curious there's a link right here in this link in the description
below and thank you so much for sticking with me all the way into the video I
really appreciate it thanks and I'll see in the next video