 Good day, fellow investors! Today's Sunday stock of the week is Ford. Many see Ford see the dividend of 5.66%, see the price-surnace ratio of 5.6% and think oh Ford is extremely cheap, I should buy that and I will enjoy the dividend. However, I'm going to show you the fragilities and how that might work out or not. Is Ford a short or is Ford a buy? Let's analyze the intrinsic value, let's see a few models, let's discuss first the company and then you will get a good picture about the long-term investment in Ford. Let me start with Martin B. Zimmerman and one speech that he made at the Boston Fed. Martin B. Zimmerman is former vice president at Ford. So I cannot think of any industry more cyclical and more dependent on the business cycle than the auto industry. A good year in the industry is sales of 15 million units, a severe recession year is 13 million units. This was before 2009. A little over 15% is really the difference between decent performance and severe losses. So when you look at Ford you have to think okay this is now at the peak of the economic cycle, this is the best what it can get and then there will be severe losses in a recession. You cannot avoid that and that's what you have to keep in mind and that's also the reason why Ford looks cheap or is cheap however you want to see that. Further Zimmerman discusses how what influences the car market are interest rates and we have been hearing how interest rates are going higher and will go even more higher which will put the brakes on the car market and also economic shocks the tariffs perhaps won't be such a shock such an important shock interest rates is what can shock the car market and we have already seen that light vehicle sales have been flat for already three four years. The peak has been reached somewhere 2015 but then the line is flat. So when you analyze such a cyclical company you have to find the long-term balance of the value of the intrinsic value including cycles including huge profits when things are good and huge losses when things are bad and then when you find the intrinsic value when it is below that you buy and when it is above that you sell. The valuations you should buy when the valuations are sky high because or negative because then it's cheap and sell when the valuations are little or small like now. Ford is not cheap it is expensive probably let me show you. If we look at historical stock price we can see how in 1999 it was above 40 then in the recession it dropped to below 10 7 then it went up to 15 then it dropped again in 2009 to 1.87 then it went up to 15 then it dropped again to 7 in 2014 European recession then it went up as car sales were higher as car sales flattened in the US the stock price dropped again from 16 to the current 10 and they and many people now see oh it's so cheap it will go back to 18 we'll see now let's look at the guidance the guidance is unfavorable slightly lower slightly lower slightly higher so not much growth there in sales and not much growth in the main profit market which is the US 17 million sales expected low 17 million sales again. Full year guidance the current earnings per share is 1.70 already the adjusted earnings per share or 1.80 is the current is lower in 2018 and this shows you how even in peak economic cycle everything works perfectly that's the maximum Ford can reach. What's very important here is that profits are coming mostly from North America Europe barely profitable South America unprofitable Middle East unprofitable Asia Pacific okay small profits so really Ford is an American company and it's their most self-vehicle that leads the pack in profitability this is also a message to Tesla showing how the middle-class cars that are mostly sell sold in Europe are very highly competitive and difficult to break a profit Elon Musk watch this and learn from Ford. Further what can put pressure our commodity prices look look how if we see higher commodity prices the difference for Ford can be in billions so there will be some pressure from tariffs there will be some pressure from the spiking high commodity prices that are expected to go even higher in the late part of the economic cycle in relation to inflation. Something that you have to always look when you analyze a cyclical company are inventories and they have been spiking in Europe in US they are stable a little bit down from 2016 but okay they are not growing they are not shrinking so stability is what we have seen also in the guidance profits pre-tax profits were what 7 billion and 3.1 billion will be spent for shareholder distributions this is the key everybody looks at the dividend and they okay they think is it sustainable in 2018 it will be probably sustainable 2019 we don't know 2020 when a recession comes very very unlikely that it will be sustainable another risk for Ford is the pension the US plans had the return of 13.4 percent in 2017 what happens when stocks drop such a return was probably made thanks to a lot of exposure to stocks if stocks drop there will be a lot of new needed funding from Ford which could really really make it hard for Ford to finance all of this so let's just quickly look at the revenues now there are 156 billion if they drop 30 15 percent in recession they will go to 132 billion that's 24 billion the profits are 7 billion so you could easily see similar amount of losses in case of a recession losses of 5 6 7 billion which is 1 $2 per share I have made three models here I have done an earnings per share model where it continues like it is 170 150 1 in 2020 then a loss of 1 dollar in 2021 then it goes up again then another recession in 2026 which is probable that we'll see two recession two recessions over the next 10 years and the present value discounted at 8 percent is 9.93 in case of two recessions and mild losses in two years and I have put a fair value final value of 10 in 2028 current price a middle model everything works perfectly earnings per share stays stable over the next 10 years we see no ref session and we give a stock price of 17 at 2028 let's say they pay all out in dividends the present value is 18 dollars so if you think of investing in Ford and making money from stock private movements then you should look at the middle model what's the likelihood that Ford hits 1.7 in earnings over the next 10 years or higher earnings when they show that they have reached the limit now if I take the average earnings over the last 10 years I get again to a present value of 11.43 and the current stock price even in 2028 so this is how I see Ford now it's probably fairly valued the upside okay it can always go higher if there are more expectations that there will be no recession but the downside the question is okay how low can Ford go from a balance price we are there now the question is if there is a recession if there are negative earnings let's say two dollars per share negative earnings what would be the stock price will people think okay but Ford is cyclical we know that we are still going to pay two ten dollars for a stock that loses two dollars and cuts its dividend to zero or are people going to panic those dividend holders those that are buying Ford now are they going to panic and sell into oblivion and we will see Ford at five at three that's the question you have to get the answer before investing in Ford this is the balance price okay fairly valued what will happen in the next three four five years will I have lower opportunities or will it be like this because people know the market knows it is cyclical I'll finish by quoting Peter Lynch on how to invest in automotive stocks if you know you're cyclical you have an advantage in figuring out the cycles for instance everybody knows there are cycles in the auto industry eventually there are going to be three or four up years to follow three or four down years they always are cars get older and they have to be replaced people can put off replacing car a year or two longer than expected in recession but sooner or later they are back in dealership the worst the slump in the auto industry the better the recovery so looking forward to your comments this is how I view Ford as a margin of safety investor as a really low risk high reward I'll wait for Ford to come below five to recheck it again at this moment if you have your extremely diversified portfolio and you can reinvest and rebalance then you should allocate perhaps a small part to a fairly valued long-term Ford thank you for watching look forward to your comments I'll see you in the next video