General Body Meeting 10.20.10

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Nov 17, 2013 (3 years and 11 months ago)

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General Body
Meeting 10.20.10

Mutual Investment Club of Cornell

Agenda


Announcements


Headlines


Ford pitch


Quant team commentary

2

Mutual Investment Club of Cornell

Announcements


Hope everyone made it to the GS event today


Doug
Braunstein

of JP Morgan 10.28.10 at
8:30pm in
Statler

Ballroom


CFO of JP Morgan


Former Head of Investment Banking


Elections to be held on November 10
th


MICC social event to be announced soon

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Mutual Investment Club of Cornell

Headline 1

David Shim

4

Mutual Investment Club of Cornell

Cotton Prices hit Record High


December cotton contracts have hit $1.1980/pound this past
week, a 56% surge in 3 months


Highest price since Reconstruction and the highest since the
creation of the New York Cotton Exchange in 1870


Caused by rising demand in China and other emerging
markets


Flooding in Pakistan and heavy rains in China have hurt
supply


Shrinking margins for apparel companies who may have to
raise prices starting next year, even in weak economy


For the past 15 years prices usually range between 40 and
80 cents


Mutual Investment Club of Cornell

Broad Based Commodity Rally


Other commodities such as sugar, orange juice and
coffee have soared in price


Pushed by a weakening dollar, strong demand
from emerging markets and weather
-
related
supply issues


Consumers could begin to see higher prices for
daily necessities


The China Cotton Association and other groups lay
part of the blame on speculators


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Mutual Investment Club of Cornell

Headline 2

John Yoshida

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Mutual Investment Club of Cornell

Technology Sector Earnings


Earnings Announcements


Intel


Strength in corporate demand and emerging markets


Google


Continued core strength…


Apple


Competition ahead



Mutual Investment Club of Cornell

Tech M&A Rumors?


Yahoo


AOL, PE Firms?


Saw flat revenue + loss of market share


Seagate


Bain, TPG, and KKR considering take over



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Mutual Investment Club of Cornell

Headline 3

David Wong

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Mutual Investment Club of Cornell

Investment Bank Q
3

Earnings


Overall earnings were stronger than expectations


Banks face challenges in expanding loan
portfolios and decreases in asset bases


Much of earnings were driven by decreases in
loan loss reserves

a sign of improved credit


Trading revenues were down at JPM, Citi, & GS,
but up at BAML; IB revenues were mixed


Mortgage foreclosure issues caused JPM to
increase their litigation reserves

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Mutual Investment Club of Cornell

Ford Motor Company

Mutual Investment Club of Cornell

Business Description


Ford is 4
th

largest automobile manufacturers


Largest U.S. auto manufacturer and only one to
not accept government money


90 manufacturing plants all over the World


Brands include: Ford, Mercury, Lincoln, and a 11%
stake in Mazda


Powerful Brand with Strong Reputation as opposed to
many competitors (No bailout, Toyota Image Problem)

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Mutual Investment Club of Cornell

Product Line


Since 2007 have sold Aston Martin, Jaguar, Land
Rover, and Volvo


Mercury marquee to be phased out late 2010


Ford marquee used globally, Lincoln in N.
American and Middle East


Mutual Investment Club of Cornell

Growth will come from Emerging Markets


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Mutual Investment Club of Cornell

Ford has price control on larger cars, also plans to
expand on compact, efficient cars


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Mutual Investment Club of Cornell

Thesis: A Return to Sustained Profit


Restructuring made company very profitable and able to manufacture
in the US as well as around the world with higher margins


New focused strategy that features a quality streamlined product line
around the world with a focus on compact fuel
-
efficient cars


Potential Expansion into China, India and South America


Cheap valuation as the markets have not noticed Ford’s strong
performance in a slow
-
growth market



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Mutual Investment Club of Cornell

Company Fundamentals are Strong
and Improving


Outperformed estimates the past fiscal year


Strong Cash Flow that is paying down long term
debt


Strong operating margins through efficient cost
cutting


Improving balance sheet


Overlooked strong earnings amidst slow growth
economic environment


Sustainable high margins and robust profitability



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Mutual Investment Club of Cornell

Ford Management


Led by CEO Alan
Mulally

since 2006


Since that time, he has driven Ford’s turnaround
and profitable growth


Originally chosen because of his past experience
at Boeing after September 11


Proved he could manage “in the midst of a crisis”

Mutual Investment Club of Cornell

Ford Management

Mutual Investment Club of Cornell

Volvo Divestment


Ford made deal in December to sell Volvo


Volvo will be sold some time in 2010


This should free up some capital

Mutual Investment Club of Cornell




Mutual Investment Club of Cornell

ONE FORD


Began in 2007


Prompted and allowed by the fact that world tastes in
vehicle size are converging. Americans are beginning to like
smaller cars, and Europeans and Asians are beginning to like
larger ones.


Plan to have the majority of Ford’s business be in the sale of
comparatively few cars, with small, cheap adjustments for
local markets.


This, in theory, should accelerate development and reduce
costs, allowing Ford to stay at the top of the global American
car market and even compete with European car makers.



Mutual Investment Club of Cornell

Fiesta


Leader of European small car
segment


U.S. launch happened this year



Cornerstone of the ONE Ford
plan


Small, and fuel efficient
-
40mpg
highway


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Mutual Investment Club of Cornell

Pricing Advantage (Quality Product)


With

the

recently

launched

Fiesta,

Ford

appears

to

be

following

a

pricing

strategy

that

has

a

spread

of

over

$
6000

or

50
%

of

the

base

price
.

Moreover,

with

the

pricing

combined

with

the

scale

efficiencies

from

the

global

Fiesta

platform

(discussed

below),

Ford

management

expects

solid

profitability

from

the

US

Fiesta
.


The

new

Taurus

demonstrates

the

core

of

the

Ford

pricing

(and

volume)

strategy,

which

is

not

just

to

price

up

in

general,

but

to

deliver

value
-
added

option

packages

at

a

significantly

higher

price

point

and

make

those

attractive

to

a

significant

proportion

of

the

vehicle

buyers



even

if

at

far

lower

than

previous

volumes
.


The

Taurus

had

been

a

breakthrough

product

for

Ford

in

the

mid
-
1980
s

as

the

first

successful

Big

Three

counterpunch

to

the

Japanese

dominance

of

mid
-
sized

cars,

and

had

sales

averaging

in

the

400
k
-
500
k

range

for

much

of

the

1990
s

(including

the

look
-
alike

Mercury

Sable)
.


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Mutual Investment Club of Cornell

Focus


The new Focus was the first car to be wholly
designed with One Ford in mind. Focus will be
sold in 122 countries, with projected production of
2 million vehicles a year by 2012.


Mutual Investment Club of Cornell

Fuel Efficiency


EcoBoost

introduced in the 2010 model year to many awards.


Special line of engines designed with direct injection and turbo
chargers, meant to imitate the feeling of a larger, sportier engine,
while increasing fuel efficiency by 20% and reducing greenhouse gas
emissions by 15%.


By 2012, the company plans to produce 750,000
EcoBoost

units
annually in the US and 1.3 million globally in the world market.


Ford expects over 90
-
percent of its global vehicle lineup to offer
EcoBoost

engine technology by 2013.


Partnering with
Peugot
, the leader in diesel F1 racing engines, to develop
a line of production diesel engines.


The first Euro 6 engines will hit the market in 2013 with improved fuel
economy and driving sensation.



Mutual Investment Club of Cornell

Ford
PowerShift


Ford’s dual clutch transmission.


Introduced in the 2010 model year, two years
before
Chrysler(Fiat
) and GM plan to introduce
their own versions.


Reduces fuel consumption by as much as 10%.


Nearly eliminates the shifting sensation normal
with regular automatic and manual transmissions.


Produced in partnership with
Getrag
, who makes
transmissions for most major automakers.


The partnership started in 2001.





Mutual Investment Club of Cornell

MyFord



Microsoft Sync


Ford’s electronic integration system paired with Microsoft’s
voice recognition and media software.


Designed to be affordable so that the vast majority of cars
sold can have
MyFord

and Sync across product lines and trim
levels.




Mutual Investment Club of Cornell

Safety


Inflatable seatbelts


2012


In 2009, Ford introduced Adaptive Cruise Control
and Collision Warning with Brake Support, and
Blind Spot Information System with Cross Traffic
Alert. These technologies help drivers avoid
potential collisions by using radar to detect the
position of other vehicles and warn the driver with
a combination of visual and audio alerts


Continually, more U.S. government 5
-
star crash test
ratings than any other brand.



Mutual Investment Club of Cornell

Growth in Emerging Markets


Latecomer to emerging markets but catching up
based on quality products and strong brand
appeal


Ford is poised to capture growth in BRIC countries


Robust in SA, 4
th

in industry sales in Brazil


$2.3 billion investment over 5 years to increase
capacity in Brazil, projecting pre
-
tax profits of
$1.7 billion in 2012 up from $765 million in 2009


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Mutual Investment Club of Cornell

Competitive Advantages


Ford is uniquely positioned to capitalize on growth in sales in both the United
States (when they recover) and emerging markets


Stronger balance sheet has allowed them to make the proper investments
and will allow them to continue making necessary investments


Ford has already seen its sales in Asia and Africa rise 40% YTD


$510 million investment in China and $500 million investment in India to
tap into these emerging markets


Anticipates 70% of its sales growth to come from this Asia
-

Africa
region in the next 10 years and the steps they have taken have
already allowed them to start realizing this growth


As mentioned above, automobile manufacturers have high fixed costs;
therefore the fact that Ford is profitable even with such low sales figures is
impressive


analysts believe that Ford will be very profitable by doing
what they are doing as soon as sales pick up


32

Mutual Investment Club of Cornell

Product Innovation in India


Ford Figo


Manufactured in India


Launched Tuesday at very low price


$7,690


Designed for India


Larger, more expensive

Than Tata Nano

Mutual Investment Club of Cornell

Ford Restructuring to cut costs


Responded to recession by making hard but necessary
decisions:


Cut North America salaried personnel by 20%


Selectively cut back on product lines


Eliminated $163 million in retiree benefits


First U.S. automaker to respond to consumer demand for
more compact car


Mulally

negotiated four new agreements with the UAW
-
this
brought down labor costs from $76/hour to $55/hour


Mulally

bullish on stock, recently worked out a deal to pay
union in cash rather than stock


Mutual Investment Club of Cornell

Profitability through successful
restructuring (Operating Margins)

35

Mutual Investment Club of Cornell

Resilient Earnings Power

36

Mutual Investment Club of Cornell

Ford Outperforming (Sept. US Auto Sales)

37



Ford
+46%
Honda
+26%



GM
+22%
Toyota
+17%



With a 43% jump in monthly sales, Ford reached

sales of 142,285 vehicles vs. 141,951 for GM, beating

them for the first time in 12 years

Mutual Investment Club of Cornell

Mutual Investment Club of Cornell

Income Statement: A Return to Profit

39

Mutual Investment Club of Cornell

Successful Strategy=5 profitable quarters

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Mutual Investment Club of Cornell

Income Statement: Improving Margins and Surging
Earnings

41

Mutual Investment Club of Cornell

FY2010 Q2 Earnings


Ford posted $2.6 billion in profit


Fifth consecutive quarter of gains


Total Revenue of $31.3 billion beating analyst
estimates of $29.8 billion


Repaid $7 billion of automotive debt, leading to
savings of $470 million in annual interest

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Mutual Investment Club of Cornell

Strong Cash Flow
-
Paying off Debt

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Mutual Investment Club of Cornell

Balance Sheet
-

Increasing Equity

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Mutual Investment Club of Cornell

Growing Earnings + Sustainable Margins + Improving Balance
Sheet = High Returns

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Mutual Investment Club of Cornell

Cheap Valuation (Undervalued)

Company


P/E


PEG


Beta

Ford


6.65 (Low!)


.04


2.45

Toyota


19.85


.17


.72

Honda


10.31


.02


.75


Priced relatively cheap



High Beta could result in high
price increase if/when market
stabilizes

Mutual Investment Club of Cornell

P/E Valuation


Steadily Improving Balance Sheet with increasing
Returns on Assets


Sustained Profitability


Emerging Markets Growth


Higher P/E ratio justified


With a P/E of of 10 and estimated 2011 EPS of
$2.00 (after
-
tax) gives a $20/share valuation




47

Mutual Investment Club of Cornell

EV/EBITDA Valuation


Takes into account Ford’s complex capital structure


However it ignores profitability and Ford is improving in this
area steadily


Using a conservative EV/EBITDA of 5 and Barclays estimates
of 2011 EBITDA of 11.4 we find an EV of auto operations of
57 billion. When added with excess cash and Ford Credit,
Total EV is 94.3 billion.


With estimated 2011 total liabilities of 30.6 billion, equity
value is 63.7 billion


$63.7 billion / 3.44 billion shares =
$18.52/share

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Mutual Investment Club of Cornell

Current Share Price = $13.32

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Mutual Investment Club of Cornell

Risks


Competition from other automakers:


GM is having its IPO sometime in the next month


Growing competition from China and Korea (Kia,
Hyundai, etc.)


Toyota has responded to its recent problems by
implementing a “smart stop system”


Is this solution effective and is their reputation already
tarnished?


Economic Slowdown, High Unemployment, Decreased
Consumer Spending


Short term short speculation

Mutual Investment Club of Cornell

Proposal


Make $3,000 investment = 226 shares


Technical patterns point to short term small dip
however with impending investment grade ratings
and strong results should push to higher plateau


1
-
2 year time frame


Target price = $20


Potential returns of up to 50%


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Mutual Investment Club of Cornell

Technical Analysis

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Mutual Investment Club of Cornell

Quan

eam

Analytics

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Mutual Investment Club of Cornell

Quan

eam

Analytics

Using 300 days of past data the Z
-
scores follow:


BollingerBands
= 0.72 standard deviations above


MACD
=
1.31 standard deviations above


RSI
=
1.56 standard deviations above


Aggregating these we get an average Z
-
score of: 1.19



This
means that conditional to the past 300 days of data,
F is
at the top 88% of its evaluation range.


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Mutual Investment Club of Cornell

Insights


Technicals

indicate price will decrease in the short
term


Momentum and RSI currently at a regional plateau



Stock price of F will rise again in the future


Possibility that F will be upgraded to investment
grade status


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Mutual Investment Club of Cornell

Prediction

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Short term decrease in price, but an overall increase in the long term

Mutual Investment Club of Cornell

Proposal



No hedging




Buy puts



Protect short
-
term downside indicated by
technicals

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Mutual Investment Club of Cornell

Thanks for coming by


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