64. Should we all be short Ford and other auto companies?
Here’s the lead-in logic behind today’s question. For those inclined, there’s a spreadsheet at the bottom:
- There is some chance that the global automobile fleet will be reduced to <5% of its current size over the next generation. A compelling version of this thesis is laid out by Zack Kanter here. Kanter cites a PricewaterhouseCoopers analysis (available here) which estimates that the number of vehicles on the road will shrink from 245 million to just 2.4 million (99%) based on the proliferation of autonomous vehicles. The tone of the analyses, both Kanter’s and PwC’s, is one of “when not if.”
- Methodologies used to arrive at a view of the value of a company rely in large part on future value. In fact, in many valuation models, much of the value of a stock is attributed to the company’s performance during the period beginning in 3–5 years and continuing until the end of time (the “terminal value”). This value estimate can represent >65–70% of a company’s value in some models.
- So there’s tension here: predictions that an entire industry may evaporate in the next 5–15 years, on the one hand; valuation methodologies that often attribute a great deal of value to a company’s performance during that period of time, on the other.
- Thinking about that tension, I decided to look at Ford’s stock price chart. $F currently trades at $13.99 per share. That’s down 10% over the past year.
- Research analysts on Wall Street believe the stock is worth between $15.00 and $22.00. The mean and median of a range of estimates from this community are $17.65 and $17.00, respectively.
- Based on a research report I was able to get my hands on, and with some very basic assumptions and extrapolations (below), I created an extremely simple DCF analysis which yielded an implied price per share of $17.17, in the middle of the range that the pro’s have presented. I present this comparison only to suggest that this analysis is at least directionally in line with what people who spend all day every day studying this company thinks is the reality.
- The value for Ford Motor Co. that yields that $17.17 per share estimate is composed primarily of two components: An estimate of the present value of its cash flows over the next five years ($17.8bn), and an estimate of the present value of its performance after that point ($31.6bn).
- If you are in the Zack Kanter camp, and you believe it’s even within the spectrum of possible outcomes that the global vehicle fleet witnesses a 99% reduction… Wouldn’t you find it a bit crazy that the market is still valuing the company as if it will be able to maintain roughly its current performance for a lonnnnggg time… and even more crazy that professional analysts are acting as if Ford might continue to grow at an inflation-like rate into perpetuity?
- For illustrative purposes, if you assume that the company performs completely normally (growing revenue at ~3.0% and maintaining its existing profit margins) for the next 5 years, but then literally evaporates, my makeshift analysis would suggest that the stock is actually worth only $9.28 today.
Note: I’m fairly rusty on the public company analysis front (if I ever knew how to do it to begin with). This analysis is all presented in the spirit of exploring a question. I am quite sure that there are errors in both my logic and my methodology.
Note to reader: This is day 64 of 92 in my commitment to write for 30 minutes each day from October 1 through the end of 2015. Previous posts can be found here.