CEO Mulally May Leave Ford Before End of Year Vital Statistics David Whiston, CFA, CPA, CFE Senior Analyst david.whiston@morningstar.com +1 (312) 384-5442 The primary analyst covering this company does not own its stock. Research as of 21 Apr 2014 Estimates as of 11 Mar 2014 Pricing data through 18 Apr 2014 Rating updated as of 17 Apr 2014 Currency amounts expressed with "$" are in U.S. dollars (USD) unless otherwise denoted. Contents Analyst Note 1 2 Analyst Note 21 Apr 2014 On Monday, Bloomberg broke the news that Ford president and CEO Alan Mulally, 68, will resign before the end of this year and be replaced by COO Mark Fields, 53. Ford has not announced anything, so for now the story is only a rumor, but these types of things have proved true in the past. For example, in January 2012, Ford vehemently denied the upcoming departure of then CFO Lewis Booth; Booth resigned a few months later. Fields is a longtime Ford veteran with stints running Mazda, Ford's former luxury division Premier Automotive Group, Ford Europe, and most recently the Americas. We are not changing our fair value estimate or moat rating, nor is the news a surprise. We wrote in our Jan. 8 note that we did not expect Mulally to stay beyond this year because he has accomplished the turnaround Bill Ford hired him to do. Should this rumor be true, it would deviate from Ford's announced succession plan that Mulally would stay through at least the end of 2014. We would like Mulally to stay for many more years, but an earlier-than-announced departure does not trouble us, since we believe Fields is ready to take over. We do not expect Fields to deviate much, if at all, from Mulally's One Ford strategy. Also, the sooner Ford makes an announcement, the faster it ends the speculation as to when Mulally will leave and if Fields will indeed succeed him. Assuming Mulally is ready to leave, and given Fields' deep Ford experience, we do not see a reason to keep the latter waiting for the CEO job. Assuming he takes over, we see Fields' immediate challenges as the launch of the new generation F-Series pickup later this year, retaining key members of senior management, and reinventing Lincoln. One change we would welcome would be an increase in share buybacks, because Ford's stock is trading well below our fair value estimate. Market Cap (USD Mil) 63,101 52-Week High (USD) 18.02 52-Week Low (USD) 12.65 52-Week Total Return % 27.1 YTD Total Return % 4.5 Last Fiscal Year End 31 Dec 2013 5-Yr Forward Revenue CAGR % 3.2 5-Yr Forward EPS CAGR % 8.6 Price/Fair Value 0.64 Valuation Summary and s Fiscal Year: 2012 2013 2014(E) 2015(E) Price/Earnings 8.6 9.6 11.9 8.4 EV/EBITDA 11.2 12.3 13.5 10.2 EV/EBIT 18.4 21.4 26.5 16.8 Free Cash Flow Yield % 1.6 1.9 1.1 6.5 Dividend Yield % 1.5 2.6 3.2 3.9 Financial Summary and s (USD Mil) 2012 2013 2014(E) 2015(E) Revenue 126,567 139,369 138,452 147,712 Revenue YoY % -1.3 10.1-0.7 6.7 EBIT 5,709 5,588 4,570 7,198 EBIT YoY % -7.9-2.1-18.2 57.5 Net Income, Adjusted 6,036 6,557 5,531 7,790 Net Income YoY % 8.9 8.6-15.7 40.8 Diluted EPS 1.50 1.60 1.35 1.91 Diluted EPS YoY % 11.5 6.7-15.7 40.8 Free Cash Flow 1,268 1,872 839 4,245 Free Cash Flow YoY % -86.5 47.6-55.2 406.1 Historical/forecast data sources are Morningstar Estimates and may reflect adjustments. Analyst Note: EPS for consolidated company while financial statements exclude Ford Motor Credit. Profile Fiscal Year: Ford Motor Company manufactures automobiles under its Ford and Lincoln brands. The company has about 16% market share in the United States and nearly 8% share in Europe. Sales in North America and Europe made up 64% and 20% of 2013 auto revenue, respectively. The company also owns 3.5% of Mazda. Ford has about 181,000 employees and is based in Dearborn, Mich. Page 1 of 6
Financial Summary and s 3-Year Hist. CAGR 2011 2012 2013 2014 2015 5-Year Proj. CAGR Growth (% YoY) Revenue 5.3 7.5-1.3 10.1-0.7 6.7 3.2 EBIT -1.2 7.1-7.9-2.1-18.2 57.5 11.0 EBITDA -2.0-5.4-4.1 3.8-8.2 32.5 8.3 Net Income 2.0-10.3 8.9 8.6-15.7 40.8 8.6 Diluted EPS 2.7-8.9 11.5 6.7-15.7 40.8 8.6 Earnings Before Interest, after Tax 1.2 196.5-79.0 65.9-28.2 45.5 6.1 Free Cash Flow -33.9 45.2-86.5 47.6-55.2 406.1 26.9 Profitability 3-Year Hist. Avg 2011 2012 2013 2014 2015 5-Year Proj. Avg Operating Margin % 4.5 4.8 4.5 4.0 3.3 4.9 5.3 EBITDA Margin % 7.4 7.7 7.4 7.0 6.5 8.0 8.5 Net Margin % 4.6 4.3 4.8 4.7 4.0 5.3 5.6 Free Cash Flow Margin % 3.2 7.3 1.0 1.3 0.6 2.9 3.0 ROIC % 20.4 41.6 7.6 12.0 8.5 12.0 12.1 Adjusted ROIC % 28.3 57.5 11.2 16.3 10.8 14.5 15.0 Return on Assets % 12.4 25.4 5.6 6.2 4.8 7.1 7.6 Return on Equity % -146.4-555.8 70.6 46.0 24.5 31.1 27.9 Leverage 3-Year Hist. Avg 2011 2012 2013 2014 2015 5-Year Proj. Avg Debt/Capital 0.61 0.69 0.66 0.49 0.43 0.34 0.28 Total Debt/EBITDA 1.49 1.33 1.52 1.61 1.61 1.00 0.90 EBITDA/Interest Expense 12.33 12.01 13.19 11.78 10.54 16.10 20.58 Valuation Summary and s 2012 2013 2014(E) 2015(E) Price/Fair Value 0.65 0.59 Price/Earnings 8.6 9.6 11.9 8.4 EV/EBITDA 11.2 12.3 13.5 10.2 EV/EBIT 18.4 21.4 26.5 16.8 Free Cash Flow Yield % 1.6 1.9 1.1 6.5 Dividend Yield % 1.5 2.6 3.2 3.9 Key Valuation Drivers Cost of Equity % 10.0 Pre-Tax Cost of Debt % 4.0 Weighted Average Cost of Capital % 9.1 Long-Run Tax Rate % 32.6 Stage II EBI Growth Rate % 4.0 Stage II Investment Rate % 20.0 Perpetuity Year 10 Additional estimates and scenarios available for download at http://select.morningstar.com. Discounted Cash Flow Valuation USD Mil Firm Value (%) Per Share Value Present Value Stage I 17,535 19.6 4.29 Present Value Stage II 20,036 22.3 4.90 Present Value Stage III 52,114 58.1 12.75 Total Firm Value 89,685 100.0 21.94 Cash and Equivalents 25,116 6.15 Debt -15,683-3.84 Preferred Stock Other Adjustments 243 0.06 Equity Value 99,361 24.31 Projected Diluted Shares 4,087 Fair Value per Share (USD) The data in the table above represent base-case forecasts in the company s reporting currency as of the beginning of the current year. Our fair value estimate may differ from the equity value per share shown above due to our time value of money adjustment and in cases where probability-weighted scenario analysis is performed. Page 2 of 6
Income Statement (USD Mil) 2011 2012 2013 2014 2015 Revenue 128,168 126,567 139,369 138,452 147,712 Cost of Goods Sold 112,909 111,852 123,784 124,105 130,137 Gross Profit 15,259 14,715 15,585 14,347 17,574 Selling, General & Administrative Expenses 9,060 9,006 9,997 9,777 10,376 Other Operating Expense (Income) Other Operating Expense (Income) Depreciation & Amortization (if reported separately) Operating Income (ex charges) 6,199 5,709 5,588 4,570 7,198 Restructuring & Other Cash Charges 1,450 Impairment Charges (if reported separately) Other Non-Cash (Income)/Charges -2,039 Operating Income (incl charges) 6,199 5,709 6,177 4,570 7,198 Interest Expense 817 713 829 850 738 Interest Income 471 1,080 1,092 895 854 Pre-Tax Income 5,853 6,076 6,440 4,615 7,315 Income Tax Expense -11,541 2,056 2,010 1,615 2,341 Other After-Tax Cash Gains (Losses) 479 555 1,046 1,360 1,564 Other After-Tax Non-Cash Gains (Losses) (Minority Interest) -9 1 7 7 7 (Preferred Dividends) Net Income 17,864 4,576 5,483 4,366 6,545 Weighted Average Diluted Shares Outstanding 4,111 4,015 4,087 4,087 4,087 Diluted Earnings Per Share 4.35 1.14 1.34 1.07 1.60 Adjusted Net Income 5,541 6,036 6,557 5,531 7,790 Diluted Earnings Per Share (Adjusted) 1.35 1.50 1.60 1.35 1.91 Dividends Per Common Share 0.19 0.39 0.50 0.60 EBITDA 9,812 9,407 10,351 8,962 11,878 Adjusted EBITDA 9,812 9,407 9,762 8,962 11,878 Page 3 of 6
Balance Sheet (USD Mil) 2011 2012 2013 2014 2015 Cash and Equivalents 22,949 24,425 25,116 22,366 21,357 Investments Accounts Receivable 4,219 5,361 5,641 5,604 5,979 Inventory 5,901 7,362 7,708 8,500 8,557 Deferred Tax Assets (Current) 1,791 3,488 1,574 1,574 1,574 Other Short Term Assets 3,850 4,236 4,580 4,580 4,580 Current Assets 38,710 44,872 44,619 42,624 42,047 Net Property Plant, and Equipment 23,585 26,228 28,876 32,084 35,205 Goodwill 100 87 Other Intangibles -100-200 Deferred Tax Assets (Long-Term) Other Long-Term Operating Assets Long-Term Non-Operating Assets 15,481 15,271 16,107 16,107 16,107 Total Assets 77,876 86,458 89,602 90,715 93,158 Accounts Payable 14,015 15,107 18,035 18,082 18,961 Short-Term Debt 1,033 1,386 1,257 1,257 1,257 Deferred Tax Liabilities (Current) Other Short-Term Liabilities 2,734 3,044 Current Liabilities 17,782 19,537 19,292 19,339 20,218 Long-Term Debt 12,061 12,870 14,426 13,169 10,641 Deferred Tax Liabilities (Long-Term) Other Long-Term Operating Liabilities Long-Term Non-Operating Liabilities 42,208 46,502 38,899 38,899 38,899 Total Liabilities 72,051 78,909 72,617 71,407 69,758 Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings (Deficit) 5,782 7,185 16,654 18,977 23,070 (Treasury Stock) Other Equity Shareholder's Equity 5,782 7,185 16,654 18,977 23,070 Minority Interest 43 364 331 331 331 Total Equity 5,825 7,549 16,985 19,308 23,401 Page 4 of 6
Cash Flow (USD Mil) 2011 2012 2013 2014 2015 Net Income 18,447 4,466 5,755 4,359 6,538 Depreciation 3,533 3,655 4,064 4,292 4,579 Amortization 80 43 110 100 100 Stock-Based Compensation 163 134 152 147 156 Impairment of Goodwill Impairment of Other Intangibles Deferred Taxes Other Non-Cash Adjustments -478-781 235 (Increase) Decrease in Accounts Receivable -1,007-1,436-1,537 37-375 (Increase) Decrease in Inventory -367-1,401-572 -792-57 Change in Other Short-Term Assets -11,566 1,444-494 Increase (Decrease) in Accounts Payable -230-520 -1,332 47 879 Change in Other Short-Term Liabilities 793 662 1,357 Cash From Operations 9,368 6,266 7,738 8,190 11,820 (Capital Expenditures) -4,272-5,459-6,566-7,500-7,700 Net (Acquisitions), Asset Sales, and Disposals Net Sales (Purchases) of Investments -828-2,898-1,877 Other Investing Cash Flows 3,559 333 332 Cash From Investing -1,541-8,024-8,111-7,500-7,700 Common Stock Issuance (or Repurchase) -125-213 Common Stock (Dividends) -763-1,574-2,044-2,452 Short-Term Debt Issuance (or Retirement) 2,056 1,707 2,117 Long-Term Debt Issuance (or Retirement) -8,058-810 -1,439-1,257-2,528 Other Financing Cash Flows 70 31 287-140 -149 Cash From Financing -5,932 40-822 -3,440-5,129 Exchange Rates, Discontinued Ops, etc. (net) -231-93 Net Change in Cash 1,664-1,718-1,288-2,750-1,009 Page 5 of 6
2014 Morningstar. All Rights Reserved. Unless stated otherwise, this report was prepared by the person(s) noted in their capacity as Equity Analysts employed by Morningstar, Inc., including its global affiliates. It has not been made available to the issuer prior to publication. The Morningstar Rating for stocks identifies stocks trading at a discount or premium to their intrinsic value. Five-star stocks sell for the biggest risk-adjusted discount whereas one-star stocks trade at premiums to their intrinsic value. Based on a fundamentally focused methodology and a robust, standardized set of procedures and core valuation tools used by Morningstar s Equity Analysts, four key components drive the Morningstar Rating: 1. Assessment of the firm s economic moat, 2. Estimate of the stock s fair value, 3. Uncertainty around that fair value estimate and 4. Current market price. Further information on Morningstar s methodology is available from http://global.morningstar. com/equitydisclosures. It has not been determined in advance whether and in what intervals this document will be updated. No material interests are held by Morningstar or the Equity Analyst in the financial products that are the subject of the research reports or the product issuer. Regarding Morningstar s conflicts of interest: 1) Equity Analysts are required to comply with the CFA Institute s Code of Ethics and Standards of Professional Conduct and 2) Equity Analysts compensation is derived from Morningstar s overall earning and consists of salary, bonus and in some cases restricted stock; however Equity Analysts are neither allowed to participate directly or try to influence Morningstar s investment management group s business arrangements nor allow employees from the investment management group to participate or influence the analysis or opinion prepared by them. Further information on Morningstar s conflict of interest policies is available from http://global. morningstar.com/equitydisclosures. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The original distributor of this document is Morningstar Inc.. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Page 6 of 6