What is Ford (F) Worth? A Case the Stock is Worth Up to $24

The comeback of Ford Motor (NYSE: F) has to make you proud to be an American. Pulled-back from the brink of bankruptcy by industry outsider Alan Mulally, Ford was the only major U.S. automaker not to receive a bailout from the U.S. government. Consumers responded well to the company's vigor and product line, sending market share for the company soaring.

With the company's new found success has come a surging stock price - up 341% year-to-date and up 574% from the 52-week low of $1.50 per share. Investors who got in on the turnaround story early need to pat themselves on the back, but also need to ask themselves "is there any more upside here?" New investors considering a position need to be asking the same question.

After being eluded from profitability for years, in the latest quarter (Q3) the company surprised the street with a $0.26 per share profit, ex-items, versus analysts estimate of a $0.13 loss. Revenue also came in ahead of analyst estimates for the company in the quarter with $30.90 billion, versus the consensus of $28.31 billion. It was the most profitable quarter for the company in more than four years.

Ford's return to profitability doesn't appear to be a fluke either. Analysts on average are looking for a fourth quarter profit of $0.14 per share and $0.48 next year.

With profitability, Ford's stock has changed from a speculative call option to a legitimate security that can be valued based on the future earnings power of the company.

Now investors have to figure out what the earnings power of the company is and what is an appropriate multiple to pay up for this earnings power.

What are the analyst saying?

• Analysts at Standpoint Research don't think it will be problem for Ford to earn $2.00 a share or higher in 2011-2012, and set a price target on Ford of $12 based on this.
  
• J.P. Morgan thinks an EV/EBITDA valuation approach is a more appropriate for Ford as opposed to a P/E ratio. EV/EBITDA is Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization or Enterprise Multiple. Based on Q3 results, minus some adjustments like unsustainable strong net pricing and Volvo losses, J.P. Morgan came to EBITDA of $7.9B. They said on a normalized-basis this would move up to $10.3B, or or $10.8B EBITDAP (before pension costs). Apply a 5x multiple to the $10.8B auto EBITDAP implies a $54B auto EV. This number is adjusted to $35B after deducting estimated 09-end net debt of $12.3B, deducting $13.8B of estimated employee obligations, deducting $3.2B market value of minority stakes, adding $2B of estimated net Volvo proceeds and adding $8.2B value of Ford Credit. J.P. Morgan estimates the post-dilution share count is ~4.35B, normalized market capitalization at $43B (adjusted up from $35B to reflect dilution-resultant obligation reductions) and, therefore, a per share fair value of ~$10. The firm has a Neutral rating on Ford.
  
• Goldman Sachs uses multiples of P/E and EV/EBITDA adjusted for pension and OPEB net of service cost to get to their $11 6-month price target on the stock. Goldman applies a 12x multiple on consolidated EPS, discounted back to the present using a cost of equity of 15%. Looking ahead, the firm said Ford shares are worth approximately $15 looking out to 2012 based on 12x an EPS estimate of $1.28. 12x 2013 estimated EPS of $1.42 makes the share price value $17. The firm has a Conviction Buy List rating on Ford.

Auto stocks traditionally trade at a 6-8x P/E multiple. So on this basis, if the earnings power is $2 per share as Stanpdoint suggest it could easily be argued that Ford could be worth $12-$16 per share. With shares of Ford currently trade at $10.11, this could suggest upside of another 19%-58%.

If you take a 12x multiple, as Goldman suggest, on this $2 EPS number you can argue that the stock is worth $24. That implies 140% upside from the current price.

So is $2 in EPS reasonable to expect? If you take the post-dilution share count of 4.35 billion shares this would imply that Ford's has to make $8.7 billion to hit this goal.

Here is how the company's income from continuing operations has looked for the past 10 years:
2008: Loss of $14.7 billion
2007: Loss of $2.76 billion
2006: Loss of 12.63 billion
2005: Profit of $1.63 billion
2004: Profit of $3.2 billion
2003: Profit of $921 million
2002: Profit of $283 million
2001: Loss of $5.35 billion
2000: Profit of $5.5 billion
1999: Profit of $6.5 billion
1998: Profit of $21.4 billion

Looking back at the late 90s, you see that the $8.7 billion profit goal looks like a stretch but is not crazy. So $2 per share in profit may not be unreasonable.

So if investors start valuing Ford on forward EPS of $2, a case can be made for a stock price of $12-$24 per share.

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