Competitive Analysis Of Ford Motor Company
Ford Motor Company is a leader in automobile industry with their operations throughout the globe in North America, South America, Europe, Asia-Pacific and the Middle East Africa. The company sells automobiles under the brand of Ford Motor and luxury cars under Lincoln brand. They serve their customers through two main services, Ford Motor which focuses on manufacturing automobiles and Ford Credit which helps in financing the purchases of these vehicles.
This report is divided as follows. Section I talks about the competitive analysis of Ford Motor using Porter 5 Force, Section II assesses WACC of the company through last 5 years, Section III uses various valuation methods to find the intrinsic value of Ford Motor and section IV concludes whether Ford Motor Company is a good investment.
Competitive Analysis
Ford Motor has a lot of competition in the automobile market. A competitive analysis can be done to analyze their position in the industry by using Porters 5 forces.
Threat of new entrants: Low
Threats of new entrants basically are the emerging businesses that intend to join this sector. Ford Motor face a very low threat from the new entrants because of the high capital cost, expenses to run the business and time to create such a brand name. Ford already requires a significant amount of investment to keep their operations and production up and running and to maintain their day to day expenses. Moreover, Ford have developed a strong brand name and they keep making changes and upgrades in their technology and products to keep their brand name and their market presence. Based on these factors, Ford Motor is less affected by threat of new entrants.
Bargaining power of Buyers: Moderate
The customers of Ford motor usually include individual buyers and rental buyers. Although automobile is a big expenditure but customers can easily transfer from one brand to other. So, Ford cannot make a significant change in their market prices because changes in their customer demands can have a great impact on their profitability. So, there is a moderate level of the bargaining power of buyers. Thus, Ford motor must make sure to keep their customers satisfied to maintain market share.
Bargaining powers of Suppliers: Moderate
The suppliers of automobile products must ensure that they offer a competitive price to Ford, since there are lot of suppliers in the market other than the existing. Above that, Ford has a vertical integration through Ford River rouge complex, which the company uses to produce certain goods and materials used to manufacture and finish the product. These factors help to reduce the bargaining power of the suppliers and help benefit the company but at the same time, the alternative portion of the buyers puts weight in the bargaining power of the suppliers, ultimately leading to moderate level of bargaining power.
Threat of the substitute Products: Moderate
A company in automobile industry usually faces danger of substitute from their competitors as well as from other sources of transport like public transport, bicycles and used cars. Quality and design are one of the major aspects which buyers look for while switching from one product to other and Ford motor have always differentiated its product. Also, the management of Ford claims to have a focal point in matter of quality and design. Therefore, it can be said that Ford experiences a moderate level of threat from substitute of its products.
Competitive Rivalry: High
Ford faces a high level of competitive rivalry. Its main competitors are Toyota, General Motor, Volkswagen, etc. In automobile industry, the exit barriers are high due to the huge investments the companies have already made. Ford Motor have responded well to its competitors, by increasing their focus on lowering their cost and increasing their quality of products. Also, they have been recently focusing on technology of electric vehicles in awareness and demand for eco-friendly cars. But still, it is very difficult to compete against the top companies and difficult to make market dominance in the presence of such key players.
Assessment of Weightage Average Cost of Capital
The WACC of Ford has declined from 3. 58% in 2014 to 2. 26% in 2018. Although the company is trying to increase their funding through equity, which is considered an expensive source of funding as compared to debt funding, the WACC is decreasing. Decreasing WACC of a company is always considered beneficial since it not only helps to reduce the cost of borrowing capital but also helps to increase the value of the firm because the value of the firm is the present value of all future cashflows discounted by WACC.
But in case of Ford, the decreasing WACC is not beneficial since the major reason for decline is due to the year on year decline in the company share price, from $16. 3 in 2014 which has now decreased to $8. 7 in 2018. Low share price reduces the market capitalization of the company ultimately leading to reduced weighted cost of capital.
It is usually said that stock prices tend to mirror the investors’ expectations of profits. The profits of the company have also decline drastically by 52% in the last year from $7602 millions in 2017 to $3,677 millions in 2018. The reason for low profits in year 2018 is due to the unfavorable exchange rate movements and lower income from affiliated companies compared to rest of the companies. Also due to the sharp decline in the Ford sales in China, which was once a very promising growth story, a steady source of profits, have now affected the revenue stream. Ford Motor is more inclined to debt financing. So, the recent decline in the tax rates have reduces the tax benefits for the companies and also due to the rising interest rates, the cost of borrowing debt has become more expensive than before. So, as the company starts making more profits, there might be rise in the investor expectations leading to rise in the share price, which in the end would lead to higher WACC in the future period.
Valuation of Ford Motor
Valuation of the company helps to find out the true or the intrinsic value of the company. There are various valuation metrics which can be used to value a company. This report takes into consideration the P/E ratio multiple, Gordon growth Model and Free Cash Flow Valuation to compute the intrinsic value of Ford Motor.
Price to Earnings Multiple
P/E ratio basically help to know the price per share to the earnings per share, or rather how much investors are paying for each dollar of company’s earnings. P/E ratio of Ford has increased from 5. 45x in 2017 to 8. 32x in 2018. The increased P/E is not due to the increasing investor expectations but rather due to decreasing net income of the company by almost 52% from 2017 to 2018 leading to lower Earning per Share and thus increasing the P/E multiple.
P/E ratio is not useful on its own but extremely useful when compared with the industry average and other companies. Ford motor trading at a P/E of 8. 32x has an industry average of 10. 6x. The competitors of Ford motor, General motor and Toyota, have a P/E ratio of 7. 11x and 10. 1x respectively. When compared with competitors, the P/E of Ford motor is much lined up, but when compared to the industry average, it can be said that, Ford is slightly undervalued as compared to the other companies in this sector.
In the coming year, when the net profit of the company increases, the EPS will also increase, ultimately leading to lower P/E in the coming year. But if the investor expectation increases, which would have a positive effect and increase the share price, it would help the P/E ratio of Ford to move to near the industry average P/E.
Gordon Growth Model
Looking at the increasing series of dividends every year for the last 5 years from 2014 to 2018 from $0. 5 to $0. 75, a growth rate of 4. 45% has be assumed for the constant increase in the dividends of company in perpetuity. Even though the company was not able to make huge profits in 2018, the management claims that they have enough cash reserve and free cashflow to pay regular dividends to their investors.
Gordon Growth Model assumes a constant growth rate in dividends per share and uses future dividends to get an intrinsic value of the company. So, after carrying out valuation using Gordon Growth for 31st December 2018, Ford Motor have an intrinsic value of $15. 7 assuming a rate of return of 9. 28% and growth rate of 4. 45%. As compared to the current price of $8. 98 as on 1st April 2019, low intrinsic value suggests that the stock of Ford Motor is undervalued. Limitations of using this model is the assumption of constant growth of dividends for future period. The growth rate is assumed taking an average of the previous years to estimate the future growth in dividends irrespective of the market conditions prevailing. But, due to business cycles, it might sometimes not be possible for the company to make a constant growth in dividend payment. Required rate of return is the rate which the investors are willing to accept but different investors use different methods to evaluate this rate. So, by taking different assumptions in the rate, the intrinsic value might differ.
Free Cash Flow Valuation
Free cashflow is the excess cash which the company generates after all the expenses. It helps the investors to measure how good the company is at generating more cash and measures the profitability of the company. Even if there are fluctuations in the net profit of Ford motor, there has been an overall rise in the free cash flow.
For valuing Ford based on FCFF valuation, a growth in Free Cash Flow at rate of 1. 36% and WACC rate of 2. 73% are considered. These rates are considered taking an average of the rates of the last 5 years, because an average of past years would make a better estimate for forecasting values of future years. The intrinsic value using FCF valuation is around $15. 8 and the current price as on 1st April, 2019 is $8. 98. So, it is clear that the stock price has been undervalued when considering FCF to value Ford.
But the free cash flow may not increase as per the growth rate. This is because due to the lower net profit in 2018, Ford might use FCF to pay regular dividends. Also, Ford has now been focusing on technology of electric cars, so free cash can be used for future opportunities and capital investments which might have some impact on the growth rate of the Free Cash Flow.
Conclusion
Competitive analysis of Ford Motor concludes that Competitive rivalry is a major concern for the company and that they must make strategic solutions to gain competitive advantage.
According to the valuation methods of Gordon Growth, P/E multiple and Free Cash Flow, Ford Motor is an attractive investment because the intrinsic value is very high than the price at which the company is actually trading, stating that the company is quite undervalued.
Being traded at a very cheaper price, Ford motor can be said to be in a troubled position. The major reason for the concern is the trade tensions in China, due to which their revenues have been affected, leading to lower net income. Rising gas prices and the increasing interest rates are making it tougher for the customers to afford cars. Also, the demand for electric cars are increasing, which has again affected the sales of the old generation Ford Cars.
Ford faces challenges and competition. Although according to valuations, it is a cheap buy, the company is facing huge headwinds which might lead to lower revenue for the next few years. But if Ford is able to is able to get back their revenue stream in China by making things work out, maintain their dividend payment as the management claims they can and work on their technology to start making electric cars, Ford can be a Long-term investment. But until that happens and their revenue streams stabilize, recommendation for Ford Motor Company has a Hold signal.
