The only way to consistently get stocks at low prices is to buy them at a bargain of their true value. With Ford Motor Company (NYSE:F) currently trading at only 10.67 times its earnings, it appears cheap — but is it a true bargain?
To answer this question, let’s see how Ford holds up to some tried-and-true bargain-identifying criteria, as provided by the father of value investing, Ben Graham. For comparison’s sake, we’ll look at Ford’s performance side by side with one of its closest American competitors, General Motors Company (NYSE:GM) .
Let’s see how Ford Motor Company (NYSE:F) holds up to some of Graham’s standards of a bargain purchase for the intelligent investor.
Strong financial condition
|Current Ratio (MRQ)||2.80||1.30|
|Net Current Assets to LT Debt (MRQ)||0.77||0.23|
To ensure financial stability, Graham recommended that companies to have a current ratio (current assets divided by current liabilities) of at least 2.0, and net current assets (working capital) that exceed long-term debt. Neither company meets the latter requirement, although Ford comes the closest. Ford is also the only one to boast a current ratio of at least 2.0, establishing itself as the more financially stable pick of the two.
|Net Loss in Prior 10 years?||Yes||N/A|
|Net Loss in Prior 5 years?||Yes||N/A|
Source: Each company’s 10-K filings.
Graham also recommended that companies show no loss in each of the past 10 years. Unfortunately, neither company was able to achieve this, because of tough economic times from 2008-2009. Even when evaluating the companies with Graham’s relatively lax enterprising investor criterion of no loss in each of the past five years, both fail to deliver.
|Uninterrupted Dividend for Past 20 years?||No||N/A|
Graham suggested that a company should have uninterrupted dividends for the past twenty years. Again, neither company meets this objective, though Ford Motor Company (NYSE:F) at least has some history of dividends, and boasts a current (and modest) payout of $0.40.
|10-Year Earnings Growth?||Yes||N/A|
Source: Each company’s 10-K filings (calculated by comparing the three-year average of EPS at the beginning and end of the most recent 10-year period).
To ensure that his bargain finds were not cheap because of their poor quality, Graham looked for companies that grew their earnings by at least one-third in the past 10 years. Ford Motor Company (NYSE:F) was able to achieve this by increasing its 2000-2002 average (diluted) EPS of negative $0.42 to the 2010-2012 average of $2.67. General Motors Company (NYSE:GM) doesn’t have 10 years of comparable data available, given its 2009 reorganization.