I read pretty regularly that investors believe Ford Motor Company (NYSE:F) as well as General Motors Company (NYSE:GM) are undervalued looking at the price-to-earnings ratio. While they do trade at low forward P/Es of roughly 9.5 and eight, respectively, we have to keep in mind that Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) both historically trade at lower P/Es. After Ford Motor Company (NYSE:F)’s roughly 90% run-up from around $9 to over $17 recently, I’m not shouting that Ford Motor Company (NYSE:F) is drastically undervalued anymore – but that doesn’t mean Ford isn’t still a buy, because I believe it is.
The road ahead
There are many reasons to remain optimistic about Ford Motor Company (NYSE:F) as an investment – sit back and take a look and it’s easy to see where Ford aims to make improvements. Ford Motor Company (NYSE:F) wants to continue to improve its financial stability, which would make it an even safer and more valuable investment opportunity. There are three key points to focus on: automotive debt, pension funding, and cash flow.
As of last week, Ford’s automotive debt was at $15.8 billion, not including the roughly $90 billion from Ford Motor (NYSE:F) Credit, a figure that should lower in the years ahead. Ford’s been vocal about wanting to reduce its automotive debt level to about $10 billion. It shouldn’t have any problem reaching this goal: Consider that Ford’s already paid off the roughly $23 billion in loans it received in 2006 to fund the restructuring of the company. The company stays on top of its debt payments, easily seen in the trend of its total long-term debt:
Underfunded pensions are plaguing many large corporations, and Ford is no different. Because interest and discount rates are so low, companies must increase the amount they’re obligated to pay into the fund – rapidly ballooning the underfunded pension figure. Ford’s pension plan is underfunded by $18.7 billion, which is still better than crosstown rival General Motors Company (NYSE:GM)’s staggering $27.8 billion. Ford’s pension is underfunded by an amount that is larger than its automotive debt, and just as important.
Fortunately, this year Ford has witnessed discount rates increasing between 70 and 80 basis points, drastically reducing the underfunded figure. An increase toward the high end of that range would reduce Ford’s pension gap by 42%, down to $10.8 billion by the end of this year, said Matthew Stover, an auto analyst with Guggenheim Securities, according to Automotive News.
That’s an absolutely huge swing and, in combination with Ford’s pledge to pay in $5 billion, will put the company in a much more financially stable position and free up even more cash – giving investors just one more reason to buy in.