The Cars Are Great, What About the Company?

The Market Still Doesn't Appreciate Ford's Future

Pick any metric for measuring a business, and Ford looks like a winner.
As we mentioned earlier, sales are up 19% since 2009. On top of that, gross margins have doubled from 7% in 2008 to 13.8% in 2012. The debt level has fallen from $148 billion to $103 billion. Earnings per share have risen from a loss of $6.50 to a gain of $1.50. The company went from life support to paying $1.7 billion in dividends. (And as I always say, dividends are an excellent sign of financial health.) Return on equity has hit 33%, better than 464 of the 500 stocks in the S&P 500.
If you were to show someone those numbers, they'd probably guess the stock is trading for an inflated valuation. That kind operating performance must belong to some high-priced growth stock.

Ford Motor Company (NYSE: F, $17.15, Yield: 2.4%) Market Cap $67.41B Revenue (ttm) $142.50B Enterprise Value $149.55B Free Cash Flow (ttm) $3.44B EBITDA $11.99B Shareholder Friendliness Profitability Earnings Per Share (ttm) $1.52 Profit Margin 4.26% Dividends Per Share $0.40 Operating Margin 4.55% Payout Ratio 20% Return on Assets 2.15% Dividend Yield 2.40% Return on Equity 33.17% No. Yrs Paid Div 51 Metrics No. Yrs Increased Div 2 Price to Sales 0.47x Ex-Dividend Date Oct-13 Price to Book 3.51x Balance Sheet P/E (forward) 9.82x Cash $25.74B PEG (five-Yr) 0.81 Debt $103B Book Value (per share) $4.87 No. Shares Outstanding 3.94B

That's not the case with Ford. In fact, the stock trades at a level that should make value investors' mouths water.
The stock has been rising steadily... but it's still cheap.

We're talking about 9.8 times forward earnings, less than 0.5 times sales, and 3.5 times book value.
Based on the stock price, the market is still waiting on Ford to complete its turnaround. Most people don't realize... it's already happened.
Here's part of why investors have been slow to recognize Ford as a quality investment.

Muni Bonds Are Still a Buy In the August e-mail update, I told you, "Municipal bonds are one of the safest income-paying securities I know." Despite Detroit's recent bankruptcy filing, bonds remain a great way to earn tax-free income safely. We currently hold three municipal-bond funds in our portfolio:Invesco Value Municipal Income Trust (NYSE: IIM),Nuveen AMT-Free Municipal Income Fund (NYSE: NEA), andNuveen Municipal Value Fund (NYSE: NUV). All of these funds are trading at discounts to their net asset value (NAV). IIM is trading at an 8% discount, NEA for an 11.5% discount, and NUV for a 5.4% discount. This month, we're moving NEA from a "Hold" to a "Strong Buy." The large discount on this fund is offering us a great time to invest. IIM and NUV remain "Strong Buys."

Ford has a lot of debt, $103 billion. But that's down substantially from a few years ago, when it had nearly $149 billion in 2008. The interest on that debt costs $713 million per year. Again, that's high, but it's barely one-third of the $2.06 billion in interest the company was paying a few years ago.
Then there are pension obligations. Right now, Ford has $64 billion in pension assets and figures to owe $82 billion, an $18 billion gap. Wisely, Ford uses a reasonable expected return on assets of 7.4%... less than others, like General Electric at 8% or apparent super-investors Delta Air at 8.9%.
Overall, for a business generating $3.4 billion in free cash flow per year, the pension gap seems manageable.
Neither of these objections – or any others that I can think of – justify Ford's low price today.
Even if the turnaround slows, Ford's low price gives it a large margin of safety. It simply shouldn't decline much from here, no matter what happens.
Now's the opportunity for us to become shareholders before the broader market gets wise to just how well Ford's performing.

Action to take: Buy Ford Motor Co. (NYSE: F) up to $17.50. Please use our standard 25% trailing stop to protect your capital. And follow our position-sizing rule of limiting individual stock holdings to 4%-5% of your investing portfolio.