I am considering Ford for it's low P/E. However, what's holding me back is the debt ratio is almost 3 times the market cap, at 98B. If it can generate free cash flow of 7-8B a year with, say, an optimistic boost to 14B, still it will take 7 years before it can clear its debt. The current ratio at 1.2 looks healthy. Price/book value of 8.9 is extremely expensive, one will get nothing if it liquidates.
Can anyone who have done analysis comment on its debt and consider it a buy? I understand car industry requires large capital expenditure upfront by leveraging debt. This is exactly what get GM into trouble when sales vanish and the debt strangled the giant. I need convincing evident before invest in it. It's present price is assuming 20% growth year over year. It's very expensive to me.
The high debt level of F is a big concern, but what's even a larger concern to me is the fact that current analyst growth estimates for F are terrible. For example, consensus earnings' estimates for F are currently $1.88(11E) and $1.91(14E) vs $4.27(11E) and $6.76(14E) for GM. GM's earnings are estimated to grow rapidly going forward while F's are estimated to grow very slowly or not at all. Add the fact that GM's PE, PEG and debt is lower, while its cash level is about 50% higher than F is why GM is the much better buy today.
Not to me. FORD has $12.7 Billion in automotive debt. They have stated that they want to reduce that to $10 Billion by 2015. That is a $2.7 Billion reduction over the next three years. What exactly are you concerned about?
"consensus earnings' estimates for F are currently $1.88(11E) and $1.91(14E)"
Those are wrong. In the trailing four quarters FORD has earned $2.03 per share (excluding special items).
"Add the fact that GM's PE, PEG and debt is lower, while its cash level is about 50% higher than F"
GM's pensions hugely underfunded. This alone negates the advantage in the previous statement.
Both GM and FORD are undervalued right now. And, you don't mention that FORD is on the verge of paying a dividend.
Thanks for pointing that out. Should I use 12.7B, on Appendix 14 of the Q3 financial report, as the sole debt? For Ford credit, its loan is at 80B. On conservative side, I assume 10% load lost and add additional 8B to arrive at a debt at 20.7B.