Type of paper: Essay

Topic: Ford Motor, Finance, Investment, Business, Company, Money, Russia, Internet

Pages: 8

Words: 2200

Published: 2021/01/09

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Summary

This report will walk you through the presentation of Ford Motor Company, the famous US car manufacturer. The first part of the report presents brief business overview and presentation of the company. The report also includes a discussion of recent news as well as a full financial statements analysis and ratio analysis.

After reviewing the business, I would not invest in a company like Ford for the following reasons:

Difficult industry with high fixed costs and high cyclicality: in essence business revenues are very volatile.
A struggle to remain competitive compared to other peers, who seem to outperform with regards to efficiency.
A unjustified valuation at a premium to peers, which is not rational given the fact that Ford is substantially less profitable than the aforementioned peers.

Business Overview

Ford as a company is encountering many challenges nowadays, and is an example that even exceptional companies need to change to stay the same. Within the difficult global environment, Ford has struggled to seek growth during the last year. A part of the reasons for this are exogenous to the company, for instance difficult market conditions and geopolitical tensions in Russia and the strengthening of the dollar potentially hurting part of the sales of the group. But Ford is also encountering internal problems. As our ratio analysis shows, the group is suffering from sub-par profitability compared to peers, and this problem has been worsening recently.
Nonetheless, Ford has taken a step forward. It has been involved in developing its Chinese facilities with a partner to seek for growth in promising markets, while limiting production in difficult markets like Russia. It has been maintaining necessary capital expenditures to remain competitive. Furthermore, it has started to significantly renew its available models, which represented a significant contributions to sales in March 2015, one of the most dynamic month for the auto industry during the last decade.
The plans of the company seem to be yielding great results. However, a large part of results will be fluctuating with the overall economy and market conditions. Given that automotive manufacturers have high fixed costs, the business profitability is highly sensitive to revenues.
Next, I will describe the latest financial news about the company and provide a financial statement analysis with interpretation of financial ratios.

Company News

Two news items affected Ford Motor over the past year.
Firstly, political tensions between Ukraine and Russia exacerbated during the end of the year 2014. Civil war in Ukraine and disagreements between Vladimir Putin and the West led to international sanctions against Russia, i.e. freezing Russian assets held abroad and closing access to capital markets. This caused a massive devaluation of the ruble, causing imported goods to become prohibitively expensive. As a result, the Russian economy slowed down and consumption decreased (Sharman). The consequences for Ford would likely be increasing inventories, deteriorating working capital, decreasing operating and net margins in Russia and productivity loss. There may also be impairments and write-offs, decreasing the firm’s valuation.
A second important news was published today and indicates that Ford is investing $1 billion with its Chinese partner to upgrade its local factory (Murphy). This has potential far-reaching implications for Ford, who could carry on increasing market share in China and grow. At first, this investment will increase capital expenditures, reduce free cash flow, and decrease profitability overall. But benefits will appear at a later phase, showing high revenues and profit growth. A stronger presence in the country could create awareness and reduce marketing need.

Financial Statement Analysis

Balance Sheet
The balance sheet represents a “picture” of the company’s assets and liabilities at a given point in time. Please refer to the 2014 annual report, to exhibit FS-4 for the consolidated balance sheet. Between 2013 and 2014, Ford’s assets increased slightly from $202 billion to $209 billion, representing a 3.5% increase year-on-year. While cash and cash equivalents noticeably decreased, the increase in assets was mainly due to higher receivables, higher new investments in operating leases and higher net property. Looking at the liabilities’ side of the balance sheet, total liabilities increased from $176 billion to $183, representing a 4.0% increase year-on-year. Trade payables remained relatively stable, but over liabilities and deferred revenues as well as debt both increased noticeably. The difference between the assets and liabilities is thus the equity remaining, in essence the share of the business belonging to the stockholders. Total equity attributable to the common stockholders (that is, excluding noncontrolling interests) decreased slightly from $26 billion to $25 billion, which means that the company struggled to increase the value of the business (indeed, growth in book value per share can be considered a good proxy for growth in the intrinsic value of a company). Overall, what is particularly noticeable is the fact that Ford is overall a company with an important leverage. As the ratio analysis shows (please refer to the exhibit), the leverage increased further this year, growing from 6.66 debt-to-equity ratio to 7.40. As a result, the financial risk of the business increased.

Income Statement

The income statement presents the overall turnover and expenses incurred during the past year. Looking at sales first, we can notices that they decreased from $147 billion to $144 billion, down 2.0% year-on-year. However, the Financial services segment actually grew sales by c.a. 10% - thus the decrease in sales came from the Automotive segment which accounts for around 94% of revenues. Cost management was minimal over the period, with total costs and expenses being reduced by less than 1% when sales were down 2%. An important caveat here is that an automotive manufacturer has a non-negligible amount of fixed costs, giving some stickiness to expenditures. Finally, net income saw a substantial 56% decline year-on-year, from $7.2 billion to $3.2 billion. As mentioned previously, because of important fixed costs, any decrease in sales directly impact the bottom line, in essence net profits.
Overall profitability for the group was sub-par both with regards to peers and with regards to previous years. The operating profit margin (representing the pretax earnings yield of the business) decreased from 3.7% to 2.6%, versus an industry average of 7.90%. Similar results are observable with the net profit margin, which decreased from 4.87% to 2.21%, versus an industry average of 4.90%. Finally, return on equity was above average (13.23% in 2014 compared to an industry average of 12.70%) however return on equity is magnified by leverage, and Ford is significantly more leveraged than its peers. A way to normalize for this is to look at return on assets, and in this respect, Ford’s results are once again sub-par (1.53% versus an industry average of $4.02%).

Statement of Cash Flows

The statement of cash flows presents how was the cash generated and used by the company during the financial year. Cash flows are separated under three categories: operating activities, investing activities and financial activities. The first positive sign we notice is that the cash flows from operating activities noticeably increased, from $10.4 billion to $14.5 billion. The main reason for this was an efficient working capital management and a decrease in wholesale and other receivables. In essence, the less capital is tied up in inventories and receivables, the more cash can be used for investment opportunities and generating returns. Cash used in investing activities slightly increased from $19.7 billion to $21.1 billion, which is a high number to the capitalistic nature of the automotive business: continuous investments are required to stay competitive. Finally, the company generated $3.4 billion from its financing activities, versus $8.1 in 2013. This $3.4 billion is the net of the debt raised and the cash reimbursed to shareholders, both in dividends and share buybacks. To ensure proper interest and dividends service, Ford issued $40 billion of debt in 2014. The sum of the three aforementioned sources and uses of cash reconciles a decrease in cash and cash equivalents of $3.7 billion compared to the previous year, bringing cash and cash equivalents on the balance sheet from $14.4 billion to $10.8 billion. This decrease is managed well, and I judge the cash position as still relatively satisfactory. If the cash burn rate is roughly $3+billion, the business could survive 3 more years without generating cash. Moreover, Ford still has some leeway to cut dividends and buybacks if problems arise.

Ratios

A detailed discussion of ratios has already been provided above. Other ratios can yield additional insights into Ford’s business. For instance, we can see that Ford’s quick ratio is 1.91 versus an industry average of 0.96. Therefore, we can conclude that competitors have less current assets and more current liabilities than Ford, excluding the inventory. This could mean that competitors are having liquidity problems (in essence, not enough current assets to honor current liabilities), however, it could also mean that they are doing a very efficient working capital management by decreasing as much as possible receivables and increasing as much as possible payables. A second ratio worth mentioning is the P/E ratio, which is 21 for Ford and 12.7 for the overall industry. This means that investors are willing to pay a premium for Ford’s profits, or are expected better prospects for Ford than for peers in the foreseeable future.. Note that future profits may be amplified both ways by leverage, and that Ford is more leveraged than its peers by a wide margin (please refer to the exhibits for the consolidated balance sheet and income statement).

Review of Auditors’ Opinion

Ford’s annual report for the year 2014 was audited by PWC (PricewaterhouseCoopers). These auditors emitted an unqualified opinion, which means that the financial reporting gives a ‘true and fair view’ of the financial situation and health of the company. This confirms to users of the financial statements that they have been prepared in accordance with US GAAP and that there was a proper disclosure of additional facts and changes in the notes to the financial statements.
Thus the auditors did not see any major “red flag” in the accounts. It is positive for the company, investors’ opinion, the company’s stock price, and indirectly its cost of raising capital on the financial markets.

Stock Market Activity

Ford’s stock is listed on several exchanges globally. Its main stock exchange is the NYSE, yet the stock is also traded on the Paris stock exchange among other. Exactly two years ago, the stock was trading at $13.15 a share. Today it trades at $16.03, thus representing 21.9% in capital gain over the period. During this two year period, the stock was trading within the following range: $12.44 - $18.12. Moreover, it distributed a total of $0.87 cash dividends over that period, further increasing the returns mentioned above. The last quarterly dividend was $0.15, representing a 3.74% dividend yield over the most recent trading price of $16.03. While these returns look appealing, it should be emphasized that the beta of Ford Motor Company is 1.53, meaning that the stock yielded higher returns but is also more risky than the overall market. In essence, Ford’s stock is 53% more volatile than the overall stock market. Explaining the quite volatile trading range mentioned above.

Current Developments

Recent key developments worth mentioning for the company are several. Firstly, as previously mentioned, today was announced that Ford is investing alongside his Chinese partner in a plant for the Chinese market. Secondly, the last 10_K announced that the firm is strongly focusing on new global model launches. Indeed, the company launched 24 new models, and will launch 15 new models in 2015. This number is particularly impressive considered the company has 35 models of cars overall. In essence, it should be noted that Ford has recently increased its focus towards emerging economies such as China, and has also directed its focus towards innovation. Finally, the latest 8-K filing shows that March sales in the US are posting impressive results, at their highest level for the last 9 years. We also learn that this growth is mainly propelled by the F-150, one of Ford’s new model, showing the rationale and efficiency of their strategy.
Exhibits

References

Andy Sharman (2015). Ford and GM reveal impact of Russian downturn. [ONLINE] Available at: http://www.ft.com/intl/cms/s/0/ea6e26a8-a7b3-11e4-be63-00144feab7de.html#axzz3WBrS3SVP. [Last Accessed 3/4/2015].
Colum Murphy (2015). Ford Motor drives China capacity higher. [ONLINE] Available at: http://www.wsj.com/articles/ford-motor-and-chinese-partner-to-buy-car-factory-1427966118. [Last Accessed 3/4/2015].
Ford Motor Company (2015). Annual Report 2014. [ONLINE] Available at: http://corporate.ford.com/content/dam/corporate/en/investors/reports-and-filings/Annual%20Reports/2014-ford-annual-report.pdf. [Last Accessed 3/4/2015].
EDGAR Pro (2015). Form 8-K. [ONLINE] Available at: http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=10603289-4879-9134&type=sect&TabIndex=2&companyid=3404&ppu=%252fdefault.aspx%253fcik%253d37996 . [Last Accessed 3/4/2015].

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