August 28, 2011 in Business

Ford’s resilient leadership makes for wise investment

 
Associated Press photo

CEO Alan Mulally has kept Ford on top of its game.
(Full-size photo)

Ford (NYSE: F) is no ordinary company. On the surface, its stock looks flat-out cheap, with a price-to-earnings (P/E) ratio below 10, vs. 16 for the S&P 500.

Ford has one of the most able corporate leaders at the helm. CEO Alan Mulally presciently borrowed nearly $24 billion against Ford’s assets before the credit markets dried up, using that fresh capital to maintain operations as rivals clung to taxpayer-funded life support. He continued to plow money into product development throughout the recession, as well.

Still, investing in the auto industry has historically been a tough way to make a buck. Automakers have to offer their customers the best overall value mix between price and features to maintain or grow their market share. They also have to deal with union obligations that can make producing cars quite expensive. And the cyclical industry faces sensitivity to commodity prices, too. The combination of high input prices and weak pricing power has typically led to low profit margins.

Companies in this industry have compensated by borrowing heavily, but given the lessons of the past several years, that trend might become a thing of the past.

The Motley Fool owns shares of Ford and our “Stock Advisor” newsletter has recommended it, but consider it only after weighing its risks.

Ask the Fool

Q: What’s a “run rate”? – K.D., Palmdale, Calif.

A: Imagine studying the financial statements of Porcine Aviation (ticker: PGFLY), which is growing very rapidly. If you want to estimate its current annual level of sales, you could add up the last four quarters’ worth, but that would clearly understate sales, as each quarter’s numbers have been rising. You need a run rate.

Take the most recent quarter’s sales of $50 million (up from $45 million the quarter before and $41 million before that). Multiply that by four, and you’ll have the company’s current run rate for sales: $200 million. This is not a forecast or a measure of past sales; it’s a reflection of the current level of annual sales.

Q: What is “dollar-cost averaging”? – G.N., Lafayette, Ind.

A: It’s the practice of building a position in an investment over time by investing a certain dollar amount regularly. For instance, you might purchase $360 worth of stock in Acme Explosives Co. (ticker: KBOOM) every three months. You’d do this regardless of the stock price – for example, buying 12 shares when the price is $30 and 10 shares when it’s $36.

The beauty of this system is that when the stock slumps, you’re buying more, and when it’s pricier, you’re buying less. It’s a good way to accumulate shares if your budget is limited, or if you’re not confident enough to invest a big chunk of money all at once. (Keep your commission costs in check, though!)

Buying stock regularly through dividend reinvestment plans or direct investing plans is a form of dollar-cost averaging. Learn more about them at www.fool.com/School /DRIPs.htm, www.dripinvesting.org, and www.dripinvestor.com.

My dumbest investment

I once tried day trading – for about five days. I had a couple of exciting winning days that were a real thrill, like gambling. But then I found a new stock in a field where I had some technical expertise. I traded it for about four hours. When I decided it had done as well as it was going to do, I tried to sell. But uh-oh – there were no buyers!

I called my broker, who had furnished the day-trading software along with all of the appropriate caveats. I was told that I was lucky I hadn’t invested more, and I could have and should have been handed my head! That was the end of my day trading. – T.B., Grass Valley, Calif.

The Fool responds: As you learned, day trading is not an easy road to riches. One study found that 80 percent of active traders lost money. Those who try day trading often end up losing their shirts, if not their heads.


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