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For Ask Matt readers: Ford (F) — Dangerous Rating

Monday, February 28th, 2011

For readers of Ask Matt’s recent column: Should I hold onto Ford stock or is it time to sell?

Ford gets our Dangerous Rating. This means F has poor quality-of-earnings and an expensive valuation. For example, F’s ROIC at 0.6% is in our Bottom Quintile. And the valuation of the current stock price ($15.07) implies the company will grow its profits at 10% compounded annually for over 40 years. The takeaway: avoid this stock. See details in our free report.

Ford is also used as on of the Case Studies in our latest Red Flag research: “Hidden One-Time Items Distort Earnings“. For example, since 2005, Ford has buried at least $1.7 billion annually of one-time charges within operating line items on its income statement. In 2008 alone, the company buried over $8.5 billion of one-time charges in line items like “Cost of sales”. These charges cause Ford’s reported earnings to understate, meaningfully, F’s normal operating profitability and cause F’s stock to plunge to multi-year lows. In the following years, once investors realized the normal profitability of the business was much better than indicated by 2008 GAAP earnings, the stock soared back to over $15 per share. Our case study on Ford shows how to find and rectify hidden items for Ford is in our free report on Hidden Items.

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One Comment

  1. varadha says:

    Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

    Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

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