Does Ford Have Some Gas Left in the Tank?

Most investors wouldn’t touch an auto stock with a 10-foot pole these days.

After more than a year of recession fears and sky-high interest rates, many car companies have seen their profits careen into a ditch.

So it’s no surprise that Ford (NYSE: F) has seen its stock sputter. It’s fallen more than 40% from its January 2022 high.

But while some may see a clunker destined for the scrap heap, a deeper look under Ford’s hood reveals a company that may be underappreciated by the market.

The auto giant’s recently reported Q4 and full-year 2023 results provide some encouraging signs that a turnaround could be taking hold.

Revenue revved 11% higher to $176 billion for the full year, marking the second straight year of double-digit top-line growth. And net income surged from a $2 billion loss to a $4.3 billion profit, driven by continued strength in the company’s Ford Pro commercial vehicle and services business and its core Ford Blue internal combustion engine operations.

And crucially, adjusted free cash flow jumped to $6.8 billion, well above the top end of Ford’s guidance of $5.0 billion to $5.5 billion.

In Q4 specifically, the underlying business remained resilient despite ongoing supply chain snarls and the costly United Auto Workers strike, which dinged EBIT (earnings before interest and taxes) by a hefty $1.7 billion.

When we strip out those transitory impacts, profits for Ford’s core auto business actually improved year over year.

The company’s balance sheet also looks sturdy, with over $46 billion in liquidity (including nearly $29 billion in cash) providing ample cushion.

But what really caught my eye is how Ford stacks up on two key valuation metrics I use in my Value Meter system.

The first is enterprise value to net assets (EV/NAV), which looks at the total value of a company’s business relative to the net assets on its balance sheet. Think of it as an acquisition multiple – how much it would cost to buy up all of Ford’s production plants, inventory, cash and other assets, as well as to take on its liabilities.

Ford trades at an EV/NAV of just 0.92, a fraction of the average of 6.1 among eligible companies. In other words, the market is essentially saying you could buy up the entirety of Ford’s asset base at a discount to its stated book value.

Only 12% of eligible companies have an EV/NAV below 1, so Ford’s valuation seems overly pessimistic for a company that is churning out billions in profits.

The second metric is free cash flow to net assets, which looks at how much cash a company generates relative to the net assets it has to work with.

Ford’s average quarterly free cash flow over the past year amounted to just 3.9% of its net assets, about one-fourth of the average of 15.5% among eligible companies.

That’s not as high as I’d like, but because of the company’s extremely low EV/NAV ratio, the stock still seems a bit too discounted to me.

To be clear, Ford faces plenty of potholes ahead. Its electric vehicle (EV) business continues to rack up losses, and the company is having to rethink its all-in EV spending plans in light of Tesla’s relentless price cuts. Plus, any significant downturn in the economy would surely dent demand for its profitable trucks and SUVs.

But with the company still generating solid free cash flow and its enterprise value now below the value of its net assets, the risk-reward ratio looks somewhat skewed to the upside for patient investors.

While Ford may not be firing on all cylinders just yet, there appears to be some gas left in the tank.

The Value Meter rates Ford stock as “Slightly Undervalued.”

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