Investment Analysis and Portfolio Management - Ford Motor Company - Essay Example

Investment Analysis and Portfolio Management EXECUTIVE SUMMARY The Ford Motor Company is currently operating on revenue of $44 billion. This is 6 percent above second quarter 2006. The company has a net income of $750 million: an equivalence of 31 cents per share, for the second quarter of 2007. (Jones, 2010)The Profit estimates are $258 million: an equivalence of 13 cents per share, from continuing operations excluding special items. There was a significant year-over-year improvement for all automotive operations. Ford Motor Credit pre-tax profit of $112 million. Cost reductions of $600 million; $1.1 billion through the first half of 2007. There was automotive gross cash at June 30, 2007 of $37.4 billion. Ford Motor Company sales and revenue over the last three years has fluctuated tremendously, 2005 was 176.8 billion, 160.1 billion and for the year of 2006 and 172.5 billion for 2007. The current return on investment is -10.4 as of 2007. ( White, 2007). TABLE OF CONTENTS 1. INTRODUCTION…………………………………………………. Pg. 4 2. INVESTMENT BACKGROUND………………………………….Pg. 5 2.1. Securities and analysis…………………………………………..Pg. 5 2.2. Financial investment…………………………………………….Pg. 6 2.3. Securities………………………………………………………..Pg. 6 3. MEASURES OF RETURN AND RISK……………………………Pg. 7 3.1. Measures of Historical rate of return………………………….,,,Pg. 7 3.2. Investment Risk in Stock Market Securities……………………Pg. 8 4. CONCLUSION……………………………………………………Pg. 11 5. REFERENCES…………………………………………………….Pg. 12 1. INTRODUCTION Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in the form of interest, income, or appreciation of the value of the instrument. (Reilly & Brown). It relates to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management and finance no matter for households, firms, or governments. An investment involves the choice by an individual or an organization such as a pension fund. After some analysis or thought, to place or lend money in a vehicle, instrument or asset, such as property, commodity, stock, bond, financial derivatives (e.g. futures or options), or the foreign asset denominated in foreign currency, that has certain level of risk and provides the possibility of generating returns over a period of time. Investment comes with the risk of the loss of the principal sum. (Myles, 2003) The investment that has not been thoroughly analyzed can be highly risky with respect to the investment owner because the possibility of losing money is not within the owners control. The difference between speculation and investment can be subtle. It depends on the investment owners mind whether the purpose is for lending the resource to someone else for economic purpose or not. Through Investment analysis, an investor is in a good position to understand the trend of performance and the likelihood of getting suitable returns at the end of the investment period. Investment analysis is important to any sound portfolio-management strategy. At most, times, investors find it difficult to carry out investment analysis on their own because they lack the expertise to evaluate and identify the tricky trends. A professional advice is suitable in such a case. Through the analysis, the Ford Company’s common stocks will form part of the basis. This is because they are very much available at the stock exchange for all investors. 2. INVESTMENT BACKGROUND Ford Motor Company current mission statement is “committed to provide personal mobility for people around the world”. With that in mind, their vision is to become the world’s leading Consumer Company for automotive products and services. By improving everything, they do, the company provide superior returns to their shareholders (Vision, Mission, Values). An active investor invests all resources to determine the fair value of a stock. However, most of the times, he is unable to acquire a piece of information that is not available in the public domain (Kahan, 1992) and that information may alter the probability distribution of his investment decision (Lorie James, 1980). In this phenomenon, an active investor may infer the non-public information by considering corporate insiders’ action in their own stock (Carlton and Fischel 1983). Through learning, an investor is able to locate the best investment while making promising decisions as well. While some of the concepts are already familiar to most people, some of the concepts need proper scrutiny so that the route is defined. 2.1. Securities and analysis Securities and analysis form a base for any informed investment decision. It is only through this that an investor can be in a position to locate and identify the direction that leads to good returns. Some investments can be very successful. An investor placing $10,000 in August 1998 in the stock of Cephalon, a biopharmaceutical company traded on NASDAQ, would have stock worth $107,096 in September 2003. Similarly, a purchase of £10,000 in September 2001 of Lastminute.com stock, an internet retailer traded on the London Stock Exchange, would be worth £134,143 in August 2003. Cephalon and Lastminute.com are far from being alone in offering these levels of gain. Many high technology companies’ match and can even outstrip their performance. On the down side, losses in value can be even more spectacular. Anyone investing $10,000 in September 2000 in Palm Inc., the makers of handheld computers also traded on NASDAQ, would see that reduced to $91 in April 2003. Such falls are not restricted to manufacturers. A holding in July 2000 of £15 million in Exeter Equity Growth Fund would be worth £72,463 in August 2003 due to a fall in share price from 103.50 to 0.50. (Myles, 2003) Securities and analysis is all about data. In this sense, all investors want to go beyond the existing data because of the urge to make more profits. 2.2. Financial investment It is very true that consumption is the major motivation of investment. The investment definition in the introduction bit proves so. From this, the forms of investment arise. They are the real and financial investments. In relation to the project, financial investment is the purchase of securities such as stocks and bonds. ( Myles, 2003). Therefore, financial investment addresses the forms of securities available, the investment process and the financial theories. According to the Ford’s report of its 4th quarter in 2008, it is very evident that a net loss of about $ 5. 9 billion. This translates to $ 2.46 per share. This kind of decline was because of decline in vehicle demand. The financial chart gives a detailed overview of the 4th quarter, 2008. Financial Results Summary Fourth Quarter Full Year   2008 O/(U) 2007 2008 O/(U) 2007 Wholesales (000) ++         1,138  (505)         5,404 (1,149) Revenue (Bils.) ++   $     29.2   $ (16.3)   $   139.3   $    (34.6)           Continuing Operations ++         Automotive Results (Mils.)   $  3,279)   $ 2,390)   $ (6,203)   $  (5,105) Financial Services (Mils.)         (384)         (653)        ( 495)       (1,719)   Pre-Tax Results (Mils.)   $  (3,663)   $  3,043)   $  (6,698)   $  6,824)           After-Tax Results (Mils.)   $  (3,273)   $  2,786)   $  (7,119)   $  6,695)           Earnings Per Share ++++   $    (1.37)   $   (1.14)   $    (3.13)   $    (2.92)           Special Items Pre-Tax (Mils.)   $  (1,386)   $    2,466   $  (7,605)   $ (3,733)           Net Income         After-Tax Results (Mils.) $    (5,875) $   (3,064) $  (14,571) $ (11,848) Earnings Per Share $      (2.46) $     (1.13) $      (6.41) $     (5.03)           Automotive Gross Cash (Bils.) +++ $      13.4 $    (21.2) $      13.4 $    (21.2 Any investor looking at the above financial report can tell and decide he can make any investment with the Ford Company. Given that it underwent a series of losses from 2006-2008, expectations are that the company will perform well thereafter. The common stock will as well increase. 2.3. Securities A security is a legal contract representing the right to receive future benefits under a stated set of conditions. In any investment, investors always consider the returns and the risks attached to the returns. Return =final value of investment−initial value of investment × 100 Initial value of investment . Take this example: At the start of 2003, an investor purchased securities worth $ 20000. These securities were worth $25000 at the end of the year. The return on this investment is Return =25,000 – 20,000 ×100 = 25% 20,000 3. MEASURES OF RETURN AND RISK In matters relating to securities and investments, it is very important to understand the concepts behind the measures of risk and returns. In this case, the historical and expected rates of return and risk can help get the point straight. 3.1. Measures of historical rates of return When evaluating investments in any given portfolio, it is necessary to compare the investments widely before reaching the final decision. For example, a $ 15 stock that pays no dividend compared to a stock selling for $ 200 that pays $12 a year. Evaluating these two, their historical rates of return is necessary to make the results accurate. ( De Fusco et al 2012). If an investor is ready to commit $ 200 at the beginning of an investment and gets $ 220 at the end, what is the investor’s return for the period? The period during which an individual owns an investment is the holding period and the return of that particular period is the holding period return (HPR). (Veronesi Pietro, 2010)It can be calculated as follows: HPR= Ending Value of Investment Beginning Value of investment = $ 220 =1.10 $ 200 3.2. Investment Risk in Stock Market Securities There are many stories about people making fortunes from the securities market. This notion has enticed many others into risky investments. With the creation of the Securities & Exchange Commission (SEC) to protect investors (123Helpme.com), people felt safe already. A good number of company managers led by greed, made self-centered decisions so as to take advantage of the new unknown profit wave. Due their ideologies, there developed the agency problem. Some of the suggested solutions for the said problems worsened the situation that led to misconduct in most organizations. Evidently, creativity was used to convince those who were unaware or who had little information about financial knowhow. In any normal society, trust defines the winner. With the kind of game that brokers were applying, customers and the public in general lost trust in them. this kind of suspicion grew to the point of making the brokers accountable for the high stock prices. At the same time, most investors shied off the brokers’ contributions as they chose to pursue their dreams independently. Ordinary Investors Enter the Market: Numerous chances await the investors who get into stock business. However, it has for a very long time been the only reserve for the rich, it is clear that everybody can actively participate in the trade. This is evident because most of the common investors rely on the ideology that the National Association of Securities always act as their protector. Congress Acts to Protect Investors: with the creation of the congress back in the early 1929 during the stock market crash, investors were all in smiles because they were safe. The congress was entitled to prove to the ordinary investor that it was worthy investing in stocks. It was the only way or making them confident and willing to trade. Currently, The NASD is ranked the best self-regulatory organizations worldwide. On this basis, it is entitled to create and implement all the stock and securities related laws. These laws eliminate malicious trades that most of the brokers and analysts capitalize on (Veronesi Pietro, 2010). Regardless of this body and the enforcement of the laws, there is a lot of malpractices in the stock market. Brokers and analysts are always on the forefront. These businesses majorly on the wall streets target unsuspecting investors. They use very attractive rates and services, professional language and promising words. Shareholders and Corporation Management Conflicts: shareholders have reasons for making huge investment in the companies. However, to their surprise, there have come to realize that most of the management decisions are always personal. There is no invitation to share their views or check on the necessity of the decisions made. using this trick, most managers use the chance to come up with unaccountable expenses in their own favor. At most times, they claim there is need for salary increment or other dubious expenses (Brussee Warren, 2011). With this kind of behavior, most of the shareholders suffered the losses. This was evident in the dividends that were available to them at the end of. The managers were the beneficiaries because they took advantage of a rise in stock prices. The Risks are numerous: just like most investments, securities are risky especially when dealing with a single investor. This is because the burden of incurring losses is left to a single individual. At this very time, a lot of fraud happens because it is very challenging for the investor to keep track of the investment and the fluctuations that always happen. (Tuckman Bruce, 2010)Even once considered safe investments such as bonds no longer provide security. For example, most firms transfer their burden to individual investors whenever they fail to sell their stocks off to the institutions. This instance is very possible especially when dealing with municipal bonds. (Kleypas Lisa, 2007). 4. CONCLUSION Many previous studies (Lin and Howe, 1990) document that corporate insiders pursue special information and on that special information, not only insiders are able to earn abnormal profits through trading stocks of own firms but outsiders also able to earn abnormally by merely mimicking their actions. In financial economies literature, these findings have been considered as a violation of market efficiency. Left for the dead stocks can shoot from 50 to 100 within a period of twelve months. From the data in the Ford Company, it is very clear that the same is evident. Investing involves all the risks that come along its path. Through this, the investor can make a profit, a loss of gain nothing at all. Looking at the common stock, it is true that it very risky to participate in. an investor has to be ready to face the wedge. I can be recommended for investment because if the risks are minimized, it has good returns. 5. Work cited Brussee Warren. ( 2011). Getting Started in Investment Analysis. Macmillan Publishers. New York. Carlton D. W & Fischel D. R. (1983). The Regulation of Insider Trading. Oxford Publishers. New York. DeFusco R. A et al. ( 2012). Quantitative Investment Analysis. John Wiley & Sons. New York Jones C. P. (2010). Investments. Pearson Publishers. New York. Kahan C. (1992). An Analytical Approach to Investments. Oxford Publishers. New York. Kleypas Lisa. (2007). Blue-Eyed Devil. Macmillan Publishers. New York. Lorie James, (1980). An introduction to Securities. John Wiley & Sons. New York. Myles G., D. (2003). Investment Analysis. Macmillan Publishers. New York. Reilly F. & Keith B. (2011). Investment Analysis and Portfolio Management. Cengage Learning. London Simmons Michael. (2003). Securities Operations. John Wiley & Sons. New York Tuckman Bruce (2010). Fixed Income Securities. John Wiley & Sons. New York. Veronesi Pietro. (2010). Fixed Income Securities. John Wiley & Sons. New York. White John. (2007). Investing in Stocks and Shares. Macmillan Publishers. New York. Read More