The automobile industry consists of more than the final purchase of a car; it includes everything from production, manufacturing, retail and maintenance. Because of recent tough times, and economic uncertainties, car companies are focusing a lot more on other areas now more than ever. After the sale of the car, maintenance is a way of showing flexibility, efficiency and of course the end goal of greater financial stability and profitability. (Bureau) Focusing on these areas not only helps the quantitative factors, but also towards qualitative: customer loyalty and overall customer service of a company. (Bureau)
It has been a constant battle amongst all automotive companies to gain market share. Industry sales volume has declined from 16.5 million units in 2007 to 10.6 million units in 2009. (SEC). Due to high fixed costs in this industry, the slightest changes in sales can have a substantial effect on any of these automotives companies' cash flow and profitability. The industry has and will continue to be very competitive. Manufacturing capacity has continued to grow, due to lower-than- anticipated acceptance of new or existing products forcing many marketing and sales incentives to come about, in order for companies to gain market share or perhaps even just to attempt to maintain their position within the industry (SEC). Ford in particular has previously been very profitable in trucks and medium to large sized utility vehicles. However, customer preference and slow economic times have forced people away from these options creating a possible problematic situation and possible loss of market share for Ford. In this industry and at this point in time, it is critical for automotive companies to grow with a sense of purpose and reason. Investing just to invest isn't always the right thing to do. It takes careful decision making through acquisitions, product innovation, customers and services (Growth).
Product diversification is just one initiative a company can take in order to grab a large portion of the market. It allows customer preference fluctuation as well as a source of profit whenever demand changes. Ford and Daimler AG are two companies who are done everything possible in order to stay competitive in this industry. (Growth)
Ford was founded in 1903 by Henry Ford, known as a company of innovation and general purpose cars for the masses. (NPR) "Fordism" was coined as a term in 1914 as the method for large-scale manufacturing in an industrial workforce, the assembly line, making Ford the pioneer industrialist. Ford went public in 1956 on the New York Stock Exchange under the ticker "F." (ideafinder) Ford sold 10.2 million shares the first day, roughly 22% of the company (npr). At year end in 1988, Ford's worldwide earnings reached $5.3 billion, the highest of any auto company to date (npr). Currently, they are ranked the 2nd largest automaker in the United States and the 4th largest in the world, with their cars ranking in the top of categories (ideafinder). Currently, Ford became a parent in 1925 to the Lincoln brand, branching out into luxury cars and in 1930 became a parent to the Mercury brand creating a division focusing on mid-priced cars. At the end of 2010, Ford is said to be letting go of the Mercury brand. Additionally, Ford holds a stake in several other companies including Mazda and Aston Martin. (ideafinder)
Daimler AG, a German based company, is considered to be the automotive pioneer. In 1886, the company's founders, Gottlieb Daimler and Carl Benz, made history with their invention of the automobile. Even today, they have continued to innovate and evolve with some of the leading and superior vehicles (Daimler). Including divisions such as Mercedes-Benz Cars, Daimler Trucks, and Mercedes-Benz Trucks, Daimler AG has been recognized as one of the biggest producers of premium vehicles. Daimler AG is exchanged under the Frankfort and Stuttgart stock exchanges under the ticker DAI. (Daimler) With over 100 products in over 200 countries, Daimler AG competes through pioneering inventions. Additionally, their strengths include a strong stance in their corporate social and environmental responsibilities. With their continued developments in alternative driving systems as well as investing in hybrid drive, electric motors and fuel-cell systems, they are committed to a long term goal of achieving emission free mobility (Daimler).
Within the automotive industry, similar weaknesses exist among every company. The world consumes 82 million barrels of oil per day. Oil provides 97% of the transportation fuels that our world uses every day. (oppapers) Therefore, the automotive industry was affected greatly by the increased prices. As said before it is very important for companies to invest and make the right decisions in any opportunity to grow. When oil prices started rising, consumers became even more product specific, and more conscious as to what they will buy. These automotive companies not only are affected by the increased prices, but they are forced to invent and evolve their product to keep up with consumers demands. (oppapers)
Ford, not only affected by oil prices, was also greatly affected by the recession, having to cut jobs as well as make over 14 plants idle. Even during these hard times, Ford also had to make voluntary recall several times, having a negative effect on their market share. (recall) Since 2004, Ford's market share has dropped from 18% to 14.2% in 2008. (SEC) One of Ford's main advantages is the overall innovation of the assembly line. Additionally, while many of Ford's competitors like General Motors and Chrysler, had to accept government funded bailout money, Ford was able to avoid the bailout (SEC). As a global company, Ford continues to look to evolve through their diversification as a company and their products.
II. Valuation of Daimler AG and Ford Motor Company
A. Growth Rate Projection
To valuate the two companies, we started with the estimation of perpetuity growth rate. Based on the two companies' annual reports 2007 to 2009, we have constructed the following tables showing an average sales growth rate of negative 4.08% and negative 9.08% for Daimler AG and Ford respectively for the past five years. The negative historical growth rate results from a combined effect of global economic downturn started in 2008 and the largely saturated auto markets in Europe and the North America. However, entering into 2010, both companies have shown signs of revival. Daimler AG reported continuing positive EBIT in the 3rd quarter interim report 2010 with more than €7 billion of EBIT expected for the year. (Daimler) Ford reported increased sales in India and China by 50 percent during the first three quarters of the year and the company as a whole is expecting improved profitability for the years to come. Based on both companies' strong growth potential in the emerging markets like India and China and the revitalized economy, we set the growth rate at 3 percent for the next 5 years and the years beyond as well for both Daimler AG and Ford.
From Daimler AG Annual Reports 2007-2009
(in millions of €)
2005
2006
2007
2008
2009
Average
Sales
95,209
99,222
101,569
98,469
78,924
Sales growth rate
4.21%
2.37%
-3.05%
-19.85%
-4.08%
COGS
(76,663)
(78,782)
(77,574)
(76,910)
(65,567)
COGS as % of sales
80.52%
79.40%
76.38%
78.11%
83.08%
79.50%
Selling expenses
(9,006)
(8,936)
(8,956)
(9,204)
(7,608)
General administrative expenses
(3,862)
(4,088)
(4,023)
(4,124)
(3,287)
Research development cost
(3,337)
(3,018)
(3,158)
(3,055)
(2,896)
Other operating income (expenses)
(171)
642
27
780
190
Share of profit (loss) from investments
372
(148)
1,053
(998)
72
Other financial income (expense), net
331
100
(228)
(2,228)
(1,341)
Other expenses
(15,673)
(15,448)
(15,285)
(18,829)
(14,870)
Other expenses as % of sales
16.46%
15.57%
15.05%
19.12%
18.84%
17.01%
Capital expenditure
6,480
5,874
4,247
3,559
2,423
Capital expenditure as % of sales
6.81%
5.92%
4.18%
3.61%
3.07%
4.72%
Net working capital
(9,405)
13,291
3,207
6,742
Net working capital as % of sales
-9.48%
13.09%
3.26%
8.54%
3.85%
Depreciation
5,676
3,068
2,176
2,436
Depreciation as % of sales
5.72%
3.02%
2.21%
3.09%
3.51%
NPPE
32,747
14,650
16,087
15,965
Interest expense
2,255
2,428
2,633
2,990
2,943
Financing liabilities
33,258
Borrowing rate
8.85%
From Ford Annual Reports 2007-2009
(in millions of $)
2005
2006
2007
2008
2009
Average
Sales
176,835
160,065
170,572
145,114
118,308
Sales growth rate
-9.48%
6.56%
-14.93%
-18.47%
-9.08%
COGS
(144,920)
(148,866)
(142,587)
(127,102)
(100,016)
COGS as % of sales
81.95%
93.00%
83.59%
87.59%
84.54%
86.14%
Other expenses
(24,588)
(16,148)
(21,169)
(21,430)
(13,258)
Other expenses as % of sales
13.90%
10.09%
12.41%
14.77%
11.21%
12.48%
Capital expenditure
7,516
6,848
6,022
6,696
4,561
Capital expenditure as % of sales
4.25%
4.28%
3.53%
4.61%
3.86%
4.11%
Net working capital
99,883
109,076
116,520
97,577
88,938
Net working capital as % of sales
56.48%
68.14%
68.31%
67.24%
75.17%
67.07%
Depreciation
8,156
11,158
6,763
11,121
4,094
Depreciation as % of sales
4.61%
6.97%
3.96%
7.66%
3.46%
5.33%
NPPE
40,379
35,786
35,979
24,143
24,778
Interest expense
8,417
8,783
11,038
9,805
6,828
Debt
153,278
168,530
171,832
152,577
132,441
Borrowing rate
5.16%
B. Weighted Average Cost of Capital (WACC) Calculation
The following are the major assumptions we made in arriving at the WACC of 9.71% for Daimler AG and 8.79% for Ford.
Calculation of WACC
Daimler
Ford
Cost of debt
8.85%
5.16%
Tax rate
15%
35%
After-tax cost of debt (kd)
7.52%
3.35%
Beta
1.96
2.48
Cost of equity (ke)
14.95%
24.20%
Debt as % of capital (Wd)
61.24%
70%
Equity as % of capital (We)
38.76%
30%
Risk free rate
3.39%
2.63%
Market risk premium
5.90%
8.70%
WACC
9.71%
8.79%
a. Tax rate
The statutory corporate tax rate is used for calculation of WACC for both companies, Daimler AG at 15 percent and Ford at 35 percent (In 2007, the German government enacted new tax legislation which decreased the statutory corporate tax rate for German companies from 25% to 15%, effective January 1, 2008.). Daimler AG reported a net loss of €2.6 billion in 2009, leading to a negative effective tax rate of minus 15.1 percent. Their effective tax rate in 2008 was 39.0 percent. (Daimler annual report 2009) Given the fluctuation of historical effective tax rates, we decided that the statutory tax rate would be a better parameter in estimating WACC.
b. Cost of debt
The cost of long-term debt is the after-tax cost of borrowing through the issuance of bonds, determined by dividing the interest expense by the total financing liabilities, taking out the tax effect. Daimler's cost of debt is 7.52% and Ford's is 3.35%.
c. Beta
Source of this information is Google Finance, where Daimler AG is measured at 1.96 and Ford at 2.48.
d. Risk free rate
The 10- year government bond yield is used.
e. Market risk premium
For Ford, the source of this information is Broomberg forward based estimate of MRP. For Daimler, we used the Europe MRP that is widely used by analysts, companies, and professors. (Pablo Fernandez & Javier del Campo)
f. Capital structure
Daimler's debt/equity ratio is 1.58 in 2009, higher than the industry level of 1.15. As the company considers debt financing a cheaper way to raise capital, they tend to continue to structure their financing that way. In 2008, Daimler AG raised €1 billion in bond sale. (Forbes) Meanwhile, they also conducted share buyback as one of the measures to improve the capital structure. (Daimler annual report 2009) Based on the bouncing car sales in the US and Chinese markets in the first three quarters of 2010, Daimler AG has raised its 2010 operating profit forecast from €4 billion to €6 billion. (Bloomberg) In recognition of this positive earnings outlook and Daimler's strong business profile as the world's second-biggest luxury carmaker, credit rating agencies have upgraded Daimler's credit rating, which would help the company negotiate better borrowing terms in the future. Therefore, we conclude that the capital structure of Daimler AG is healthy despite a higher-than-industry debt/equity ratio. For calculation of the WACC, we used Daimler's 2009 debt/equity ratio of 1.58 as we perceive that the company would maintain a similar level of capital structure in the years to come.
Ford's debt has been on a very high level, over ten times the amount of their equity. The company's financial reports show negative shareholders' equity in 2008 and 2009, which means that Ford has effectively borrowed more than it has assets to pay. With liabilities exceeding assets, technically the company is insolvent. However, because of the length of time to repay the debt and the amount of cash Ford can generate through operations, the company faces no immediate danger of bankruptcy. In fact, Ford is the only viable US brand not receiving government bailout.
In order to reduce the heavy debt burden and boost its balance sheet, Ford launched a debt reduction plan in 2009 to remove 40 percent of debt from its balance sheet by offering creditors cash and new shares. The company's capital restructuring efforts also included a public offering of common stock with $1.6 billion in 2009. (Forbes and Reuters) Ford's debt reduction activities have been well recognized by the credit rating agencies. Coupled with the encouraging news of increased net income of $2.6 billion in the second quarter of 2010, the rating agencies, like Moody's and Standard & Poor's, have raised Ford's credit rating. (Bloomberg) With increased credit rating, Ford is able to retire higher-interest debt and replace it with lower-interest debt, which would have a positive effect on the company's earnings and cash flows.
Based on Ford's effective debt reduction and share offering activities, we assume that the company would optimize its capital structure by significantly reducing the debt/equity ratio. We thereby set Ford's target percentages of debt and equity at 70 percent and 30 percent.
C. DCF Model applied
With all the assumptions made above, we applied the DCF model to calculate the enterprise value for Daimler AG and Ford as follows.
Valuation of Daimler AG with DCF Model
Steady-state growth
3.00%
Steady
WACC
9.71%
State
(in millions of €)
2009
2010
2011
2012
2013
2014
2015
Sales
78,924
81,292
83,730
86,242
88,830
91,495
94,239
Cost of sales
(64,623)
(66,562)
(68,559)
(70,616)
(72,734)
Other expenses
　
(13,826)
(14,241)
(14,669)
(15,109)
(15,562)
　
EBIT
4,852
4,938
5,027
5,118
5,213
Tax (15%)
　
(728)
(741)
(754)
(768)
(782)
　
NOPAT
4,124
4,197
4,273
4,351
4,431
4,564
Depreciation
2,853
2,938
3,027
3,117
3,211
(635)
CAPEX
(3,836)
(3,951)
(4,069)
(4,191)
(4,317)
Change in NWC
　
(91)
(94)
(97)
(100)
(103)
(107)
Free cash flow
3,050
3,091
3,134
3,177
3,222
3,822
Terminal value
56,951
FCF + terminal value
　
3,050
3,091
3,134
3,177
60,173
　
Enterprise value
€47,773
Shares outstanding
1.06 B
Value per share
€45.07
Stock price 12/31/09
€37.23
% Difference
21%
Undervalued
Stock price 12/3/10
€54.62
NWC (3.85% of sales)
3,039
3,130
3,224
3,320
3,420
3,523
3,626
Change in NWC
91
94
97
100
103
NPPE
15,965
16,948
17,960
19,003
20,077
21,183
21,818
Valuation of Ford Motor Company with DCF Model
Steady-state growth
3.00%
Steady
WACC
8.79%
State
(in millions of $)
2009
2010
2011
2012
2013
2014
2015
Sales
124,148
127,872
131,709
135,660
139,730
143,922
148,239
COGS
107,586
110,813
114,138
117,562
121,089
Other expenses
　
13,395
13,797
14,211
14,637
15,077
　
EBIT
6,892
7,098
7,311
7,531
7,757
Tax (35%)
　
2,412
2,484
2,559
2,636
2,715
　
NOPAT
4,480
4,614
4,752
4,895
5,042
5,193
Depreciation
6,821
7,026
7,237
7,454
7,677
(493)
CAPEX
5,250
5,408
5,570
5,737
5,909
Change in NWC
2,498
2,573
2,650
2,730
2,812
(2,896)
Free cash flow
3,553
3,659
3,769
3,882
3,999
1,804
Terminal value
31,184
FCF + terminal value
3,553
3,659
3,769
3,882
35,183
PV of cash flows
　
3,266
3,092
2,928
2,772
23,093
　
Enterprise value
$35,151
Shares outstanding
3.47 B
Value per share
$10.13
Stock price 12/31/09
$10.00
% Difference
1.30%
Undervalued
Stock price 12/2/10
$16.78
NWC
83,268
85,766
88,339
90,989
93,718
96,530
99,426
Change in NWC
2,498
2,573
2,650
2,730
2,812
NPPE
24,778
23,207
21,588
19,922
18,205
16,436
16,929
Based on our valuation, Daimler AG and Ford have been undervalued for 21% and 1.3% respectively as of 12/31/2009, which suggests that both companies would be a good investment, especially for Daimler. Our qualitative analysis of the financial performance of the two companies will further support our assessment in the following parts of our report.
D. Sensitivity Analysis
As we have identified the WACC and the perpetuity growth rate as the most critical assumptions in valuating a company, we decided to conduct a sensitivity analysis to see how the value per share of the company would change with the combined effect of the two variables. For example, in Daimler's case, a change in WACC with 0.5 percent up or 0.5 percent down will change the company's value per share by $3 to $4.
DCF Sensitivity Analysis-Daimler
WACC
8.21%
8.71%
9.21%
9.71%
10.21%
10.71%
11.21%
Perpetuity growth rate
2.20%
52.77
48.60
45.02
41.93
39.22
36.84
34.72
2.40%
54.02
49.63
45.88
42.65
39.83
37.36
35.17
2.60%
55.36
50.72
46.79
43.41
40.48
37.91
35.64
2.80%
56.80
51.89
47.75
44.21
41.16
38.49
36.14
3.00%
58.35
53.15
48.78
45.07
41.87
39.09
36.65
3.20%
60.03
54.49
49.88
45.98
42.63
39.73
37.20
3.40%
61.85
55.94
51.05
46.94
43.43
40.41
37.77
3.60%
63.82
57.50
52.31
47.97
44.28
41.12
38.38
3.80%
65.97
59.19
53.66
49.06
45.19
41.88
39.01
DCF Sensitivity Analysis-Ford
WACC
Perpetuity growth rate
7.29%
7.79%
8.29%
8.79%
9.29%
9.79%
10.29%
2.20%
15.25
14.06
13.06
12.21
11.48
10.84
10.27
2.40%
14.75
13.56
12.58
11.74
11.02
10.40
9.85
2.60%
14.20
13.03
12.06
11.24
10.54
9.93
9.41
2.80%
13.60
12.44
11.50
10.70
10.03
9.44
8.94
3.00%
12.94
11.81
10.90
10.13
9.48
8.93
8.44
3.20%
12.22
11.13
10.25
9.52
8.90
8.37
7.92
3.40%
11.43
10.38
9.54
8.86
8.28
7.79
7.37
3.60%
10.55
9.56
8.78
8.15
7.62
7.17
6.78
III. Qualitative Analysis
When deciding whether to invest in Daimler, the quality of the financial statements is also an area that an investor must pay attention. Looking at the quality of the sales is a good place to detect any problems Daimler AG may currently have, or any problems that may arise in the future. First, finding the net sales consisted of taking the cash from sales and adding the net change in accounts receivable. Next, the net change in allowance for sales return and discount, the net change in unearned revenue, and the net change in warranty liabilities were subtracted to arrive at the net sales.
The net sales are a good measure because cash from sales cannot be manipulated and the diagnostic looks for changes in sales relative to cash generated by sales and changes in sales relative to changes in the net operating assets. All of the ratios were taken using the end of the year financial statements, and changes were tracked over a three year period.
When looking at the diagnostics, it is apparent that Daimler AG does not attempt to aggressively recognize their revenue because when the net sales are divided by cash from sales, the net sales are divided by net accounts receivable follows in the same direction. This shows that when the firm has less cash from sales, it is not due to underestimating returns and credit losses.
Also, the last two ratios are decreasing which shows that Daimler AG did not attempt to reduce the estimate of unearned revenue in the hopes of increasing the accounts receivable. The overall diagnostic shows that there isn't an attempt to manipulate the sales.
However, one major difference apparent is the change in net accounts receivable in 2007. After more research, the large change was supported by the increased cash and was further supported by the statement of cash flows showing a large cash increase from the collection of receivables.
One potential risk on the financial statements was the pension obligation that Daimler owes. The current service costs and interest costs easily outweigh the expected return on plan assets. While this currently is not a problem, it does pose a potential risk in the event that the firm is presented with the obligation to pay out their pension.
Further analysis of Daimler AG was conducted by calculating financial ratios using the most recent financial statements, the interim report for the 3rd quarter ended September 30, 2010. The liquidity ratios used were the current ratio and the acid test ratio to show Daimler's ability to cover their liabilities. The current ratio is 1.10, proving that Daimler AG has the ability to cover all of its current liabilities. However, when the more stringent acid test ratio is calculated, the ratio drops to .83, leaving Daimler AG without the ability to cover their financial liabilities. Because this is not a staggeringly low number and when coupled with other qualitative factors such as recent sales growth, this ratio does not pose a problem.
The profit margin of 3.35% for Daimler AG was calculated to find how the firm is operating. When compared with the auto industry's average, Daimler AG is slightly lower however the ratio still shows a sizable profit margin and that Daimler AG has good control over their costs. The price earnings ratio was calculated to be 37.47, which leads investors to believe that higher earnings growth should be expected in the future. Finally, the return on investment was calculated to be 9.56%, and while below the industry average, still a decent return on invested dollars.
After completing a quantitative analysis, qualitative factors must also be considered when deciding whether or not to invest. Upon determining that the quality of the financial statements is sound, news reflecting any financial claims is more dependable.
In the case of Daimler, sales in the month November for Mercedes-Benz were the highest of all time, up 19% from last year. This included growth in all product segments, which is a strong indication that Daimler AG is growing and has recovered from the recent economic crisis. Also, Daimler AG was able to hold the top market share in Germany for premium automobiles at 11.2% showing their dominance in the industry (Daimler).
One negative news release in February 2010 was the announcement that dividends would be suspended for the year, although their chief executive Dieter Zetsche has said they will resume. Although this seems like a negative new announcement, the statement was met with praise from analysts at Morgan Stanley showing management's focus on preserving cash flow in lieu of paying shareholders (Maynard).
Financial Statement Diagnostics:
2007
2008
2009
Net Sales
Cash from sales
101,569
98,469
78,924
ADD: change in net AR
(38,286)
3,514
(3,675)
LESS: change in Allow for DA/Returns
(429)
583
304
LESS: Change in UR
(5,059)
(229)
341
LESS: Change in Warrant
(3,663)
(672)
(437)
Net Sales:
72,434
102,301
75,041
Net Sales/Cash from Sales
0.71
1.04
0.95
Net Sales/Net Accounts Receivables
1.82
2.36
1.89
Net Sales/Allowance for Sales Returns and Discounts
74.60
65.83
48.16
Net Sales/Unearned Revenue
22.66
34.48
22.66
Net Sales/Warranty Liabilities
10.98
17.26
13.67
Financial Ratios:
Liquidity Ratios
Current Ratio:
1.10
Current Assets
58,283
Current Liabilities
52,864
Acid Test Ratio:
0.83
Cash and Cash Equivalents + Marketable Securities + Accounts Receivable
43,897
Current Liabilities
52,864
Capital Structure and Solvency
Total Debt to Equity
2.66
Total Liabilities
94,796
Shareholders' Equity
35,594
Long-term Debt to Equity
1.30
Long-term Liabilities
46,422
Shareholders' Equity
35,594
Market Measures
Price to Earnings
37.47
Market Price/Share
54
Earnings per Share
1
Return on Investment
Return on Assets
1.45%
Net Income + interest expense * (1-t)
1,908
Avg. Total Assets
131,866
Ford has boasted five consecutive positive quarterly profit margins. In February 2010, it outsold G.M. for the first time in 50 years. It sold some of its luxury brands including Land Rover, Jaguar, and Aston Martin to Tata Group of India for $2.3 Billion, and it then concentrated on its Ford division, in which sales have been up 27%. It sold Volvo to a Chinese conglomerate. It discontinued its Mercury models which only sold 93,000 in 2009. Ford expects its profits to continue to rise through the rest of the year and be up even more in 2011 (New York Times).
As mentioned earlier, Ford has lost some profitability and market share between 2004 and 2008 as consumer preferences shifted towards smaller, more fuel efficient cars. Ford continues to align its production infrastructure with industry sales volume and market share as well as factors such as the unfavorable overall economic condition and consumer preferences. It was for this reason that Ford sold off several of its luxury brands and discontinued others (SEC).
Glancing at the financial statements of Ford, it is easy to see that Ford was strongly negatively affected by the economic recession. In an industry in which there are high fixed costs and the volume of sales of automobiles flow to the bottom line, sales had dropped by 15% from 2007 to 2008 and operating costs were not getting any lower in proportion. They dropped another 18.5% in 2008. It is important to explore, then, whether Ford may have made any accounting quality blemishes in an attempt to manipulate sales and related figures in its financial statements.
After adding back changes in accounts receivable and deducting changes in allowance for doubtful accounts, unearned revenue, and warranty liabilities, it becomes apparent that Ford has not been aggressively recognizing revenue or underestimating returns and credit losses. The values for quality diagnostics to detect sales manipulation remain relatively stable. The largest change is in the allowance for doubtful accounts, which becomes a higher fraction of net sales. These estimates are likely due to adverse economic effects.
Two major accounting areas that are prone to manipulation in the automobile industry are overcapacity and the quality of depreciation allowances.
Ford has responded to overcapacity by slashing some of its luxury and less-profitable brands and closing four of its 33 plants in North America. It has reduced its number of dealers from over four thousand in 2005 to 3,500 in 2008, and it has reduced staffing for its financial services sector (SEC).
In examining the quality of financial statements, one useful diagnostic to detect the manipulation of core expenses involves the ratio of depreciation to capital expenditures. This ratio is gone 1.12, 1.66, 0.90, and 0.54 from 2007 to the first three quarters of 2010. Depreciation has decreasing as a fraction of capital expenditures. This is due to downsizing, the freeze of depreciation charges for the Volvo segment in 2009, recognition of a large, one-time $5.3 billion impairment in fixed assets in 2008, and increases in the estimation of useful lives of leased vehicles due to their higher prices in car auctions (SEC). Ford's $5.3 billion impairment was part of a restructuring initiative to shift its production towards consumer preferences for smaller, more fuel-efficient cars (AFP).
According to its 2010 quarterly financial statements, Ford has been doing well. It has a current ratio of 1.05, which shows that it has the ability to cover its current liabilities. Its acid test ratio of 0.74 shows slightly less ability to cover current liabilities. Without factoring in notes payable within one year, Ford's liquidity ratios are 2.3 and 2.2, respectively. In addition, Ford has several debt instruments which can be converted into equity. It has also been able to extend the maturity date of $7.2 billion of liabilities (SEC), and it has the ability to offer additional common stock if necessary.
Ford's 2010 quarterly statements up to the end of September show an operating profit margin of 6.6%, exceeding the industry average of 4.8%. It has a higher-than-average price-to-earnings ratio of 9.2, showing that investors expect high returns in the future.
On the other hand, Ford technically has no return on equity, as its overall equity is in deficit. Big contributors to this include Ford's major asset-backed borrowing of $23.6 billion followed by losses in recent years. Ford Motor Co. has plans to cut its $27.3 billion in debt load quickly, which will reduce interest expenses by $180 million. Recently, Ford has been converting debt to common stock. For example, just at the end of November it converted $1.9 billion by swapping investors' notes for shares (Yahoo). It finally expects to end the year with more cash than debt.
IV. Recommendation
After looking at all of the quantitative and qualitative information on both Ford and Daimler, we would recommend an investor to invest in both companies. According to calculations deriving enterprise value and stock price, diagnostic analysis done on the financial statements, and research completed on non-financial factors both companies show very promising futures and should prove to be a financially positive investment.
