The Performance of the Ford Motor - Delivering Value to the Shareholders - Statistics Project Example

CORPORATE FINANCE ESSAY Introduction Ford Motor Company is an American multinational automotive corporation whose headquarter is in Dearborn, Michigan. It sells commercial vehicles, most luxury cars, and automobiles under the Ford brand. It is among the companies listed on the New York Stock Exchange. This report presents an analysis of the performance of the Ford Motor Company regarding delivering value to the shareholders. The performance of the company is as well examined by considering some valuation methods. The methods of evaluation will be tested against the role the company plays in the competitive and capital-intensive economic world. Ford Motor Company Delivering Value to Shareholders In close 100 years, Ford Motors has been a symbol of business success in the United States. Majority of the shareholders and almost every investor would like to hold Ford in their portfolios long term and were much attracted to the high-yield dividend given by the company. However, recently, close to over the past five years, there has been news of trade tariffs raising concern on the performance of the car manufacturers including Ford. Taxes had their temporary effect on the stock price causing some effects on Ford regarding margins and return on the invested capital. Considering the BTMA Stock Analyzer’s company rating score, the recent score for Ford indicates that the company has been having a score of around 60 percent. The score is below the 70 percent that is least considered for a good company score (Pereira, 2017, 2). Breaking down the ratings, the company’s score for Return on Equity, 10-year Upward Price per Share, and the ability to recover from the market downturn are high. However, it indicates low scores for return on invested capital, earnings per share, and gross margin percent. From the findings, it is all clear that Ford over the past five years has been unable to grow earnings consistently. It is however ironical that the price per share has been increasing though, for Ford, there seems no correlation between the price per share and the earnings. This means that the performance of Ford regarding the price per share has been declining over the past five years since 2014 as shown in the figure below. It then translates to the decrease in the market and the demand for the stock experienced in the market. Graph 1: Upward Price Trend Source: BTMA Stock Analyzer – Price Per Share History On the other hand, the earning history indicates that upon the 2008/2009 economic crisis, Ford received close to $5.9 billion in loans from the government. Together with other measures including cutting its costs, and lobbying for and benefitting from the cash-for dunkers' program, it made a swift rebound regarding its earnings per share. However, over the five years, there has been no significant growth in the earnings of the company as indicated in the graph below. Graph 2: Diluted Earnings per Share Source: BTMA Stock Analyzer – EPS History Averagely, Ford Motor Company has tried to main return on equity at a reasonable rate over 15 percent. Though, there has not been any guarantee on the consistency of the returns over the five years. Elsewhere, the primary concern has been on the return on the invested capital that has been worse over the recent years. It has been very inconsistent making it hard to predict the business of the company or make an accurate value for the shareholders. Thus, over the five years, Ford has not generally been doing well at delivering the value to the shareholders over the invested capital. It has also had much of the inconsistency when it comes to returning the value from the retained equity of the business (Ford Motor Company, 2017, 14). The factual data available for Ford indicates that the company stock shows a lot of weakness and inconsistencies in multiple categories. This is in addition to the business nature and competition from within and foreign level that have been an issue for the company to deliver value to the shareholders over the recent years. Economic Value Added Model of economic profit has been found effective in measuring the value the company has created over a single period. This is the case since the method focuses on the existing link between the cost of capital investment and the return obtained. The model for expressing the economic profit or the Economic Value Added which commonly referred to as EVA is presented as below in simple equation. Economic Value Added = Net Operating Profit After Tax (NOPAT) –Weighted Average Cost of Capital (WACC) X Firm Capital. Weighted Average Cost of Capital (WACC) is among the key parameters that tend to define the EVA. When working out the analysis of EVA, it is important to note that both the Debt and Equity funds the capital of any business. Though the shareholders who fund the company using debt and equity are not the same hence, their interests in the company tend to conflict. Though, in considering debts and equity, the company needs to consider the tax for the debt interest as well as of profit. Both the cost of equity and the cost of debt as well their proportions are essential in determining the WACC hence their need to be determined to obtain optimum efficiency in financing the company. Thus, generally, we can say that, essentially, EVA measures the return on capital which reflects the actual economic profit after making required adjustments to Weighted Average Cost of Capital (WACC). Ford Motor Co., economic profit calculation USD $ in millions 12 months ended 2017 2016 2015 2014 2013 NOPAT 6,637 6,702 10,908 6,830 7,906 Cost of capital 4.72% 5.30% 5.11% 6.57% 6.58% Invested capital3 176,866 160,188 148,836 142,840 133,983 Economic profit4 (1,709) (1,781) 3,302 (2,553) (906) Source: Bureau of Economic Analysis Thus to get the economic profit for Ford as indicated in the above table, we use the formula: Economic profit = (NOPAT) – Cost of capital × Invested capital For: Year 2017= 6,637 – 4.72% × 176,866 = -1,709 Year 2016= 6,702- 5.30% x 160, 188= -1,781 Year 2015= 10,908-5.11% x 148, 836= 3,302 Year 2014= 6.830- 6.57% x 142,840= -2,553 Year 2013= 7,906-6.58% x 133, 983= -906 Graph 3: Ford Motor Company Economic Profit Source: Bureau of Economic Analysis For Ford Motor Company, since 2013 to 2017, the company posted the Economic Value Added of US $(1,709) M, $(1,781) M, 3,302 M, (2,553) M, and (906) M respectively. We observe a fluctuating trend where the economic profit or the economic value added for Ford Motor Company decrease from the year 2013 to 2014 before it increases drastically in 2015 (Bureau of Economic Analysis, 2018, 3). However, this economic profit again undergoes a massive decline in 2016 before slightly increasing in 2017. The drastic increase in the economic value added for Ford in 2015 can be attributed to the company completing its disposal of some of its assets which tend to have earned the company some other operating income of about $10,908 as part of selling business units to another company. The company made a large profit margin of 42% and the associated net profit that saw an increase in the economic profit (Ford Motor Company, 2017, 45). The increase in the net operating profit in 2015 could be seen as the deliberate move by the Ford Motor Company management to cut off some costs to allow the company to cater for necessary expenses. However, the decline in the economic profit could be attributed to the reduced net operating profit when the company went back to its usual business which might have incurred high costs. Probably, the company reconsidered the fair value associated with contingent measurement as recognized in the business combination by increasing the value of contingency. Consequently, the operating profit declined in 2016 and beyond. Total Shareholder Return (TSR) Ford Motor Company has experienced fluctuations in the Total Shareholder Return for the past five years since 2013. However, Ford Motor Company seems to be pursuing multiple numbers of opportunities with the intention of ensuring that the total shareholder returns are delivered by having their focus on high-growth and automotive mobility initiatives. The below figure indicates the performance of the Ford Motor regarding its total shareholder return in comparison with the S & P 500 and the Peer Group Average. Figure 1: Ford Total Shareholder Return performance Source: Bureau of Economic Analysis The Total Shareholder Return performance of Ford Motor is more aligned in competitive terms with the companies that belong to the Peer Group which are the global automotive companies. From what appears in the above chart, it is evident that the total share returns of Ford Motor lag behind that of the peer group and S & P 500 over the past five years. The company in 2015 modified its performance unit grants to include a factor of relative total shareholder return. In 2017 however, the operating results for Ford remained consistent with the positive earnings per share (Ford Motor Company, 2017, 54). The positive earnings per share are what has also benefited the shareholders reflecting an increasing total shareholder return. Since 2013 when Ford started to reinstitute dividend, about $15 million have been returned to shareholders through the end of 2017 through share-backs and dividends. Various events might have marked the improving performance of Ford Motor that has helped improve the total shareholder return. The events include the launching of eleven global products in 2017 including new F-150, Ford Expedition, the new Focus Electric and the new Lincoln Navigator. It also signed a memorandum of understanding in which it was to co-develop compact and midsize SUVs electric vehicles. Net Asset Value The net asset value for Ford Motor Company has been increasing with a massive increase from 2015 to 2016 and from 2016 to 2017. On average, the net asset value for Ford has incurred a rise from $10,690 M to $15, 453 M between 2013 and 2017 five years. Since 2015, Ford Motor has generated a high net asset value that has seen an average net asset value for five years high (Ford Motor Company, 2017, 34). It indicates that Net Asset Value is a significant valuation method for an automotive company like Ford Motor. This is because Ford as an automotive company includes many physical assets which are very critical to the operations of the company. Similar results for Net Asset Value were observed for the case General motors, S& P 500 and peer group companies. Price to Earnings Ratio (P/E) The price per earnings ratio is a result of taking the closing price divided by the recent earnings per share. It is essential is assessing the under or overvaluation of the stock. Ford price to earnings ratio has been fluctuating since 2014 through the end of 2018 as the P/E ratio in 2014 was 7.74 while in 2018 was 5.58. Comparing the P/E ratio to General Motors in 2018 was 4.95. The constant fluctuations in the P/E ratio and the reduction by Ford can be attributed to the earlier results of the company increased its earnings per share as the performance increases. Price to Book (P/B) Ratio The price to Book ratio, P/B of Ford has been declining steadily almost continuously throughout five years from 2014 to 2018. The P/B from 2014 has been 1.81, in 2016 was 1.60, and in 2018 was 1.20. The decreasing rate of the P/B ratio over the years is attributed to the increasing level of the book value per share. Discounted Free Cash Flow (DCF) Over the five years, the revenue for Ford for its auto business and other financial operations underwent separate projection. Within the period, the company’s revenue is expected to show a compound annual growth rate of about 3 percent which is considered okay for a mature company like Ford. The cost of goods sold was projected as a percentage of revenue from the average gross margin for the financial years 2016 and 2017. This as well considered the deterioration of the global margin in the auto business in the financial year 2017 and possible improvement in margin in 2018 and beyond. Most of the estimates are based on the outlook for Ford’s margin performance. It is likely to experience margin deteriorations in financial business due to various factors. They include a possible increase in the interest rates and the likelihood of competition from traditional banks when it comes to offering loans. There is an expectation that the cost of goods sold for Ford will give a compound annual growth rate of 2.5 percent. On the other hand, as the margin is expected to improve, the gross profit should show a compound annual growth rate of 6.4 percent. Table: Ford’s discounted cash flow 2019 2020 2021 2022 2023 Sales 156,673 179,784 184,893 197,899 210,833 Costs 45,763 43,732 40,432 39,832 36,134 Capital expenditure 8,563 7,842 7,234 6,982 6,562 NOPLAT 4,564 5,783 6,123 6,465 6,878 FCF 3,623 3,783 3,892 4,143 4,342 Tax 19% Present value of explicit forecast $120,332M Present value of Terminal value $10,532,123M Value of Operations $10,612,212M Cash $9,883M Debt $22,890M Value of Equity $9,732,532M Number of shares 11,860M Price per share 2,561.96p Source: Estimates of the author The sales of Ford are expected to increase following the company’s launching of global products in 2018 including new F-150, Ford Expedition, the new Focus Electric and the new. The completion of these new products and have them in the market will make Ford increase the level of sales made. However, Ford seems to have focused on the reduction of costs by focusing on major areas and avoid capital consumption activities. The reduced cost in future can be attributed to the reduced level of research and development that has been experienced in the past years as Ford has been looking forward to have new competitive products in the market. The same will be reflected in the capital expenditure of the company which expected to reduce. Reference lists Bureau of Economic Analysis, 2018. Industry Data; Interactive Access to Industry Economic Accounts Data: GDP by Industry. Retrieved from https://www.bea.gov/iTable/iTable.cfm?ReqID=51&step=1#reqid=51&step=51 &isuri=1&5114=a&5102=15 Ford Motor Company, 2018. Ford´s 2016 annual report, Retrieved from: http://www.annualreports.com/HostedData/AnnualReportArchive/f/NYSE_F_2016.pdf Ford Motor Company, 2017. Notice of 2016 Virtual Annual Meeting of Shareholders and Proxy Statement. Retrieved from https://corporate.ford.com/content/dam/corporate/en/investors/reports-and-filings/Proxy%20Statements/2016-Ford-Motor-Company-Proxy-Statement.pdf Pereira, P.J.G., 2017. Valuation of Ford Motor Company and a study of its industry (Doctoral dissertation). Read More