Ford shares priced for absolute perfection

January 28, 2010

Is Ford’s auto business worth $52 billion? With the company’s stock trading at over $11 a share, that’s the value investors appear to be putting on the car operations alone. Sure, the Detroit automaker is performing nicely compared to rivals Chrysler and General Motors. But to justify its valuation, Ford needs to prove its rebound has staying power.

Not only did Ford avoid bankruptcy, the company boosted U.S. market share and even posted its first annual profit since 2005. That’s all good news for a firm that looked to be on the brink just 12 months ago.

But a run through the numbers shows investors are being optimistic. Ford’s liabilities total just over $52 billion, in the form of debt, its underfunded pension plan and remaining unfunded healthcare obligations.

Set this against Ford’s assets. These include the finance arm, Ford Motor Credit, with an $11 billion book value; a stake in Japan’s Mazda; the $2 billion analysts expect Ford to get from a sale of Volvo to China’s Geely; and its cash pile. All told, these add up to some $39 billion.

Now, combine the $13 billion difference between the assets and liabilities with Ford’s current market capitalization of $38 billion, and that suggests investors are implicitly putting an equity value of $52 billion on the car operations.

That’s a hefty figure, but not beyond the realm of possibility. Right now, despite improvements, Ford’s auto business is still losing money – $1.4 billion before tax last year. Ford’s overall profit stemmed from debt restructuring gains and a resurgent finance arm.

But say the global auto market recovers, and Ford’s vehicle sales jump 15 percent annually to $140 billion in 2011. If virtually all of the benefits from its continuing cost-cutting program flow through as earnings, the business could achieve a pre-tax margin next year of 3.8 percent. At 15 times earnings, the multiple Volkswagen currently fetches, Ford’s current valuation looks justified.

Of course, Volkswagen has earned that multiple thanks to its relatively consistent and solid, operating performance. Ford has been in trouble for years. If shareholders aren’t convinced the Motown manufacturer’s rebound is here to stay, the six-fold jump in its stock in the last 12 months looks overdone

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