After being the only automaker to turn down financial bailout funds from U.S. taxpayers during the 2008 to 2009 recession, Ford (F) is cranking on all pistons.
In addition to substantially paying down its debt and reducing its labor expenses during the past two years, Ford returned to profitability in 2009 and substantially grew its revenues and earnings in 2010.
Ford continued to increase its sales during the first two months of this year, with the company’s unit auto sales rising at a year-over-year rate in excess of 13 percent during January and February.
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Perhaps more importantly, the significant quality improvements that Ford implemented during the past five years suggest that the company will continue to grow its revenues and earnings at healthy rates during at least the next several years. For example, on March 17, independent marketing firm J.D. Powers and Associates announced that Ford’s Lincoln-branded vehicles were the highest-rated vehicles of any auto maker in that firm’s annual Vehicle Dependability Study for 2011.
That announcement follows similar reports from the Consumers Union, whereby that provider of information on a vast array of household goods and services consistently rated Ford’s vehicles during the past two years higher than vehicles produced by other auto manufacturers.
For example, in its Consumer Reports’ 2011 Car Brand Perception Survey, Ford’s vehicles ranked second in terms of people’s overall perception of different cars and trucks. According to the surveys that were conducted by the Consumers Union in preparing that report, Ford’s vehicles had a clear advantage over all other auto manufacturers in the factors that matter most to car shoppers: safety, quality, and value.
With gasoline prices rising substantially over the past 12 months, the fact that Ford is now focusing its efforts on the production of small, fuel-efficient automobiles also bodes well for the future direction of that company’s sales and earnings, as well as the likely direction of Ford’s stock price.
Yet, Ford’s stock appears to be trading at a bargain price, with its stock having a PEG ratio of only 1.0 as of last Friday’s close. In comparison, the S&P 500 Index currently has a PEG ratio of 2.3. (For those of you who aren’t familiar with the PEG ratio, that statistic compares a stock’s price-to-earnings ratio to the expected growth rate in the underlying company’s earnings over the next three to five years. Hence, the PEG ratio indicates whether investors in general are over- or under-valuing a company’s stock.)
Meanwhile, bond-rating firm Standard & Poor’s recently raised Ford’s credit rating one level, to BB-minus from B-plus, and S&P’s analysts stated that their outlook for Ford’s debt was positive (meaning that there’s a good likelihood that Standard & Poor’s will continue to raise Ford’s credit rating). That would be a very positive development because the interest expense on Ford’s debt would continue to decline in the event of further rating upgrades.
Lastly, Ford stated in its 2010 annual report, which the company released on Feb. 28, that as of Dec. 31, 2010, it “had tax attributes that would offset $20 billion of taxable income (representing about $7 billion of our $15.7 billion in deferred tax assets subject to valuation allowance.” The company went on to say that any “continued improvement in our operating results, however, could lead to reversal of almost all of our valuation allowance as early as the second half of 2011.”
In layman terms, those comments indicate that in light of Ford’s expectations to generate a net profit for the third consecutive year during the year ending Dec. 31, 2011, the company will likely eliminate a significant portion of its deferred tax assets during the second quarter of this year. Any such elimination of those deferred tax assets would likely lead to a substantial increase in the company’s reported profits.
Robert Willens, a New York-based corporate tax specialist, said on March 3 that a complete elimination of Ford’s deferred tax assets might add $10 billion to $13 billion to the company’s net income during the current year. (Note: Whenever a corporation expects to enter a sustainable period of profitability, it is required to completely remove any deferred tax assets from its balance sheet.)
A spokesperson for Ford recently confirmed that possibility, saying “We have had a sustained period of profitability in our operations and if that continues, we would remove our valuation allowance.”
Yet, even after any such removal of Ford’s deferred tax assets, the company will likely not need to record any federal income taxes on its annual income statements until the end of this decade because Ford has a substantial amount of tax-loss benefits that it realized during the five-year period from 2005 to 2009 as a result of recording substantial financial operating losses during that period.
The factors mentioned above indicate that Ford’s stock has a good probability of rising sharply during the months ahead.
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