Research Project Part 2 - Ford Motor Co

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Research Project Part 2: Ford Motor Company Your Name UMGC: Business Finance 330 Your Professor July 4, 2022 1
Ford Motor Company Ford Motor Company, commonly known simply as Ford, is an American automobile company headquartered in Dearborn, Michigan. The company was founded by Henry Ford in 1903. Henry Ford notably contributed to the automobile history and auto production methods by introducing the first moving assembly line in 1913. With this production method, Ford mass produced the Model T selling over a million units in its 20-year run (Ford, 2022). Ford Motor Company is publicly traded on the New York Stock Exchange as NYSE: F and their fiscal year runs from January 1 st to December 31 st of each year. The purpose of this report it to analyze the financial ratios of the company along with evaluation of Ford’s stocks and bonds performance over the last year. Financial Leverage Ratios *Ford Motor Co 2017 2018 2019 2020 2021 Debt to Asset Ratio 0.86 0.86 0.61 0.51 0.54 Debt to Equity Ratio 2.94 2.80 3.09 3.63 1.84 Interest Coverage Ratio 1.80 1.41 0.94 0.89 3.52 Financial leverage is an investment strategy of using borrowed money to increase potential returns and to expand the asset base (Hayes, 2022). Companies utilize this strategy to finance their assets and invest in business operations to increase shareholder value instead of issuing stock to raise capital (Hayes, 2022). Investors use financial leverage to multiply their buying power and increase the returns of their investment. *Morningstar (2022) Debt to Asset Ratio in the table above compare Ford’s obligations (debt) to their total assets. Ford’s debt to asset ratios over the last 5 years have slightly 2
decreased and remains under 1. This means Ford has more assets than debt giving them more financial flexibility to pay higher salaries or expand more aggressively (MasterClass, 2022). Debt to Equity Ratios demonstrates the proportions of equity and debt Ford is using to finance its assets and shareholder’s equity can fulfill obligations to their creditors (Bloomenthal, 2022). Ford’s debt to equity ratios over the past 5 years were slightly increasing but took sharp decline in 2021. This means Ford was slowly increasing debt to equity from 2017 to 2020 but managed to lower in 2021 from 3.63 to 1.84, a decrease of 1.79. A lower debt to equity ratio translates to Ford lowering its risk of bankruptcy. Interest Coverage Ratio is used to measure how many times a Ford can pay its interest payments using its earnings (Hayes, 2022). An interest coverage ratio of 1.5 or lower puts the ability of Ford to meet interest expenses questionable (Hayes, 2022). Ford had a 1.84 interest coverage ratio in 2017 but fell below the 1.5 ratio in 2018 and below 1 ratio in 2019 and 2020. Fortunately, Ford was able to bring the interest coverage ratio up to 3.52 in 2021 giving them a better position. Based on the ratios above, Ford’s was financing their assets with debt, raising equity from debt, and not being able to pay off interest on their debts until 2021. During the period of 2017-2020, the financial structure of Ford was very risky and potentially placing investors’ money at risk of loss. However, in 2021, Ford improved their performance by limiting debt financing and increasing equity on their assets. Bond Performance Evaluation A bond is a debt obligation by Ford in which an investor lends money to Ford. In return, Ford commits to paying interest on the principle and return the principle 3
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when the bond matures. On Market Insider, there are currently 8 active bonds for Ford Motor Company. Bond #1 is ISIN US345370BH27 is a 40-year bond issued by Ford Motor Company in 1992. Bond #2 is ISIN US435370BS81 is a 100-year bond issued by Ford Motor Company in 1997. Par Value Bond #1’s assumed par value is $1,000, last sale price was $109.77, coupon rate is 9.95% paid semiannually, and the maturity date is 8/15/2032, the investor will pay $1,064.13 to purchase the bond. (PV = 9.95%/2, 10*2, 109.77/2, 1000, 0) Bond #2’s assumed par value off $1,000, last sale price of $98.59, coupon rate of 7.70% paid semiannually, and a maturity date of 5/15/2097, the investor will pay $ 1,279.42 to purchase the bond. (PV = 7.70%/2, 75*2, 98.59/2, 1000, 0) Coupon Interest Payments Bond #1’s coupon interest payment is calculated by taking the par value of $1,000 and multiplying by coupon rate of 9.95%. This equals to a coupon payment of $99.50 . (1000 * 9.95% = $99.50) Bond #2’s coupon interest payment is calculated by taking the par value of $1,000 and multiplying by coupon rate of 7.70%. This equals to a coupon payment of $77.00 . (1000 * 7.70% = $77.00) Yield to Maturity (YTM) Bond #1 YTM is calculated by taking the face value, annual coupon rate, years to maturity, coupon payments per year and current price. After entering the $1,000 face value, 9.95% coupon rate, 10 years to maturity, coupon payments per year of 2 and current price of $1,064.13 on the YTM calculator on investinganwers.com, the YTM for Bond #1 is 8.97%. 4
Bond #2 YTM is calculated the same as Bond #1. After entering the $1,000 face value, 7.70% coupon rate, 75 years to maturity, coupon payments per year of 2 and current price of $1,279.42 on the YTM calculator on investinganwers.com, the YTM for Bond #1 is 6.00%. Bond Comparison Given the opportunity to purchase one of the above bonds, the better investment is Bond #1. Neither of the two bonds are callable thus there is no risk of having to reinvest at lower rates. Bond #2’s maturity date is too far ahead, and the interest rate is lower compared to Bond #1. Given the recent pandemic and financial crisis, Ford has changed their strategy and operating ways. This has paid dividends as noted in their financial statements, balance sheets and current financial leverage especially compared to other automotive manufacturers like Tesla and GM. Stocks Performance Evaluation A stock is a type of investment issued by the company in the form of stock shares to raise money to finance operational needs and fuel growth (Brock, 2022). Investors purchase stocks to generate long-term returns on their investments that exceeds return generated by bonds, real estate and other commodities through dividends and price appreciation. Ford Motor Co 2019 2020 2021 Price/Earnings Ratio 23.25 - 29.67 Price/Book Ratio 1.04 1.09 2.34 Earnings per Share 6.89 8.22 9.79 Dividends per Share 0.60 0.15 0.10 Book Value/Share 8.99 8.92 8.09 Tesla, Inc. 2019 2020 2021 Price/Earnings Ratio - 1,341.58 343.11 Price/Book Ratio 12.54 42.26 40.35 Earnings per Share 95.24 175.44 121.95 Dividends per Share - - - Book Value/Share 5.22 6.67 16.70 5
Price/Earnings Ratio (P/E) Price/Earnings ratio, also known as P/E, helps investors determine market value of Ford Motor Co by showing what the market is willing to pay for their stock. This ratio aids investors in determining if the stock is overvalued or undervalued. In Ford’s case, their stocks are slightly overvalued when compared to the industry average of 21x in December 2021 (Simplywall.St, 2022). When compared to Tesla, Inc, a competing US auto manufacturer, Ford’s stock is relatively close to the industry average as Tesla is 320x more than the average. Earnings per Share Ratio (EPS) Earnings per Share, or EPS, is a monetary value of earnings per outstanding share of common stock. Investors use this value to indicate how profitable a company is on a per-share basis. Ford’s EPS, when compared to Tesla, Inc, earns significantly less. This means Tesla, Inc. earns $112 per share more than Ford in 2021. Dividends per Share Dividends per Share is the sum of declared dividends issued by a company for every ordinary share outstanding (Boyle, 2021). Ford paid $0.10 in dividends per share in 2021. On the other hand, Tesla paid $0.00 in dividends because they retain all earnings to finance future growth of the company (Tesla, 2022). Stock Comparison Investors looking to place their money in the automobile industry should not look at Ford to invest. When comparing both Ford and Tesla, Tesla’s stocks are more favorable as their earnings and other financial ratios are much higher. Tesla announced a 3-for-1 split in June 2022 in the efforts to attract more investors since their stock prices were nearing $700 per share. (Kolodny, 2022). Ford’s stocks have fluctuated between $7-$24 per share over the last 5 years. 6
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Historical Stock Prices Ford Motor Co Tesla, Inc As seen in the tables above, Tesla stocks have been historically more valuable than Ford’s stocks. Ford has closed out the last year ranging from $11 to $20 per share although Ford has nearly double the amount of shares compared to Tesla. Tesla, with half the number of shares, are worth 50x more than Ford’s shares making Tesla shares more desirable and a better investment. Recommendation Ford Motor Company needs to come up with a strategic plan to increase their earnings. Ford should acquire more debt to create cash flow as their debt to asset ratio is well below 1. They also need to lower their debt to equity somewhere between 1 – 1.5. The strategic plan of eliminating low selling sedans and other passenger cars from their line up to maximize SUV production has paid off. With the integration of the Mustang Mach-E and Ford Lighting to their EV line up should also help them reach their financial structure goals. 7
Reflection This assignment aids the students in understanding financial structure of a company and how to interpret the financial state. With these skills, the student can perform duties as a member of the finance team for a cooperation or begin to understand what to invest their money into. Although long and labor intensive, this assignment is a taste of what challenges come ahead in Cooperate America! 8
References Boyle, M. (2021). Dividend Per Share (DPS). Investopedia.com. Retrieved from https://www.investopedia.com/terms/d/dividend-per-share.asp Bloomenthal, A. (2022). How to Calculate the Debt-to-Equity Ratio? Investopedia.com. Retrieved from https://www.investopedia.com/ask/answers/062714/what-formula-calculating- debttoequity-ratio.asp Ford (2022). Our History. Ford Motor Company: Corporate . Retrieved from https://corporate.ford.com/about/history.html Hayes, A. (2022). What is Leverage. Investopedia.com. Retrieved from https://www.investopedia.com/terms/l/leverage.asp Kolodny, L. (2022). Tesla Files for 3-for-1 Stock Split. CNBC.com. Retrieved from https://www.cnbc.com/2022/06/10/tesla-files-for-3-for-1-stock-split.html MasterClass (2022). Debt-to-Assets Ratio: How to Calculate Debt-to-Assets Ratio. MasterClass Articles.com. Retrieved from https://www.masterclass.com/articles/debt-to-asset-ratio-explained#what-is-a- debttoassets-ratio Morningstar (2022). Ford Motor Co – Stock Financials. Morningstar Investor. Retrieved on July 4, 2022, from, https://www.morningstar.com/stocks/xnys/f/performance Simplywall.st. (2022). U.S. Auto Industry Analysis. Simplywall.st.com. Retrieved from https://simplywall.st/markets/us/consumer-discretionary/auto Tesla (2022). Investor Relations FAQ. Tesla.com. Retrieved fromhttps://ir.tesla.com/contact-us 9
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