Favorable price to earnings
| Metric | Ford | General Motors |
|---|---|---|
| Today’s P/E | 10.39 | 11.71 |
| Graham’s P/E | 5.87 | 9.86 |
Source: Fool.com & each company’s 10-K filing (Graham’s P/E ratio calculated as today’s price divided by the average earnings for the most recent three years).
For an adequate margin of safety, Graham sought out companies that had current prices less than 15 times average earnings for the past three years. It is here that both Ford and General Motors Company (NYSE:GM) shine the most, with very attractive price to earnings, as well as price to average earnings well within Graham’s prescribed range.
Favorable price to book value
| Metric | Ford | General Motors |
|---|---|---|
| Price to Book (MRQ) | 3.49 | 1.72 |
| Product | 20.49 | 16.96 |
Source: Fool.com (Product figure calculated as the product of price to book and Graham’s price to earnings).
Graham considered companies to be well-priced if the product of the price-to-book and price-to-earnings ratios was below 22.5 (Graham’s price-to-earnings criteria of 15 times his price-to-book criteria of 1.5). Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) both pass this criterion as well, demonstrating very attractive prices yet again.
The bottom line
So what does all this mean? Is Ford’s price truly a bargain, or is it just cheap? If you are a highly risk-averse investor looking for an ultra-safe investment, Ford may not be the stock for you. It fails to completely pass all of Graham’s stringent criteria for a safe, bargain purchase.
However, if you can afford some level of risk and have a well-diversified portfolio, Ford Motor Company (NYSE:F) could make for a great investment. Although it generated a net loss in the prior 10 years (during a recession), it has since performed well in terms of its earnings growth and still has much to gain when the market fully recovers.
Given its possibilities for growth, and Ford’s relatively stable financial condition, there’s simply no reason it should be priced as low as it is. With its stock trading at only 10.67 times current earnings and 5.87 times its average earnings for the most recent three years, Ford is definitely a bargain.
Matthew McMichen has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors Company (NYSE:GM). The Motley Fool owns shares of Ford Motor Company (NYSE:F).
The article Is Ford as Cheap as It Seems? originally appeared on Fool.com.
Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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