One thing’s for sure: You’ll never discover truly great investments unless you actively look for them. Let’s discuss the ideal qualities of a perfect stock and then decide whether Ford Motor Company (NYSE:F) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
1). Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it’s certainly a better sign than a stagnant top line.
2). Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that company can turn revenue into profit.
3). Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management’s attention. Companies with strong balance sheets don’t have to worry about the distraction of debt.
4). Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
5). Valuation. You can’t afford to pay too much for even the best companies. By using normalized figures, you can see how a stock’s simple earnings multiple fits into a longer-term context.
6). Dividends. For tangible proof of profits, a check to shareholders every three months can’t be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let’s take a closer look at Ford.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | (1.3%) | Fail |
| 1-year revenue growth > 12% | (4.7%) | Fail | |
| Margins | Gross margin > 35% | 14.1% | Fail |
| Net margin > 15% | 13.4% | Fail | |
| Balance sheet | Debt to equity < 50% | 525.7% | Fail |
| Current ratio > 1.3 | 1.68 | Pass | |
| Opportunities | Return on equity > 15% | 140.2% | Pass |
| Valuation | Normalized P/E < 20 | 10.56 | Pass |
| Dividends | Current yield > 2% | 3.1% | Pass |
| 5-year dividend growth > 10% | NM | NM | |
| Total score | 4 out of 9 |
Source: S&P Capital IQ. NM = not meaningful; Ford restored its dividend in Jan. 2012. Total score = number of passes.
Since we looked at Ford last year, the company doubled its score, more than making back the single point it dropped from 2011 to 2012. A big boost in the dividend and an improving balance sheet helped boost the company’s score, but the stock has had to rally sharply in the past few months just to eke out a 5% gain over the past year.
The key to understanding Ford’s success is to realize that unlike competitors Chrysler and General Motors Company (NYSE:GM) , Ford never declared bankruptcy, yet it managed to restructure itself more successfully. With huge production levels at its U.S. factories and a wide range of globally viable vehicles available, Ford has turned things around at home impressively. Japanese rivals Toyota Motor Corporation (ADR) (NYSE:TM) and Honda Motor Co Ltd (ADR) (NYSE:HMC) have taken notice, even as they’ve managed to bounce back from the Japanese earthquake and tsunami in early 2011 to regain lost ground in the U.S. market.
Moreover, China has been a big winner for Ford. The company saw sales nearly double in the emerging-market nation in January, with popular vehicles like its two Focus models and its Escape-clone Kuga SUV doing quite well there. Ford hasn’t done quite as well in India, where Tata Motors Limited (ADR) (NYSE:TTM) still has a big edge and has captured the low-end market, but it has planted the seeds to benefit as that market matures.
In its most recent quarterly report, Ford’s results showed the differences in the regions that the automaker serves. The company posted a pre-tax profit of $1.7 billion for the quarter, but most of that came from strength in North America. For the full year, Ford lost $1.75 billion in 2012 and expects to lose another $2 billion there this year. But if the One Ford plan does as well in Europe as it did elsewhere, then Ford may well fare much better than GM in Europe in the long run.
For Ford to keep improving, it needs to work on finding ways to get revenue growth moving in the right direction. That probably means jump-starting Europe, and while that may take a while, it’s the key toward getting Ford closer to perfection in the years ahead.
The article Has Ford Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors and owns shares of Ford.
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