Introduction
Ford Motor Company was established in 1903 by Henry Ford. The company is based in Michigan and it is one of the three market leaders in the United States of America in the automotive industry. By 1996 Ford’s revenue base had grown to over $150 billion and employed an estimated three hundred and seventy thousand employees. The success of the company was interrupted in the 1970s after the invasion of America’s motor market by competitors from Japan such as Honda and Toyota who offered cheap vehicles that were also economical in fuel consumption.
In response to this, Ford decided to take an expansion strategy in which they acquired the Volvo model from Sweden in an attempt to gain a competitive edge over their competitors. They also adopted a business reengineering process dabbed Ford 2000 which sought to reduce the number of their vehicle centers to five and which were supposed to cover operations involving two hundred countries.
The aim of this also was to reduce the amount of redundancy in the company by making use of the information technology as the driving force and the link that connected Ford to the centers scattered in different countries (Monks, Robert and Nell, Minow 579).
The main focus of the company in the process of development of the information technology infrastructure was the implementation of a setup that would support TCP/IP protocol of communication that complied with the requirements of the department of defense in the United States of America. This communication network for the Ford Company was mainly meant to allow communication of files rather than sending e-mails as was the case with other companies.
Throughout this period, there was a conscious effort by Ford motors to develop an integration of the global enterprise network that would be cost-effective. This network was meant to provide a link between the company’s headquarters and the branches that were spread across the world.
The company also increased the amount of information that was accessible on their website, created a business to a business model which would be used by business partners to interact with the company’s intranet, and developed of intelligent applications on the web that would help in the process of promotion of the business and reduction of costs of operations.
Ford motors also realized the cost reduction benefits that could be accrued by cooperating with some of its competitors in the motor industry such as general motors and the Chrysler. Through this cooperation, there was establishment of certificate referred to as the automotive exchange of network (Monks, Robert and Nell, Minow 581).
The aim of this communication protocol was to provide a standard for communication that would provide a unified way through which automotive manufacturers could communicate to the industry. Since then Ford has continued to transform its business model through re-engineering and other activities that are aimed at improvement of market position of this company.
Value Investor versus Growth Investors
Investors in the stock market can be classified as either growth investors or value investors. A value investor in the type of an investor who buys stock at cheap prices holds them until their value appreciates. The main aim of the value investor is to purchase share below the intrinsic value of such shares. Therefore, the intrinsic value of the company’s shares must be below the prices prevailing in the market for the shares of the company (Montier, James 344).
On the other hand, a growth investor is the kind of an investor who invests in the shares of a fast growing company regardless of the industry in which it operates. The main aim of the investor in this case is to get shares of a company that has growth sustainability and then leave these shares to grow in value with the growth of the company. Therefore, accurate estimation of growth is required for this approach to be successful.
The expectation of the value investor is low and the undervaluation of the stock is considered to be as a result of factors that are temporary in nature. However, the growth investors invest with high expectations that the company whose shares he invests will experience growth. He however bets that the expectations are too low and hopes these expectations would rise in the course of time. He has the belief that the expectations will continue to rise as the company continues to perform beyond expectations of the investors.
Value investors expect cash flow that is depressed. The main focus of this kind of investors is the value of assets which they use if they need to calculate the intrinsic value of their shares. They require making multiple decisions on when shares should be bought and the most appropriate time when shares should be sold in order to have a real reflection of expectations (Montier, James 354).
On the other hand the expectations of the growth investors are on the cash flows that are fast growing. Therefore they require high revenues growth driven by high rate of unit growth. They also believe in the ability of the company in which they invest to make enhanced value more than that which the market implies.
Value investor is more risk averse as compared to the growth investor. Absolute returns are the main expectation of the value investor who appears to be sensitive to the preservation of capital. Therefore, the value investors cannot take a bet about the future since they have that belief that future cannot be predicted with certainty. Therefore, they regard payment for the future as unrealistic. Growth investors on their part remains sensitive to growth rate changes with the main aim being to deliver relative performance that is more superior.
Determination of the Intrinsic Value
Intrinsic value of a share refers to the present value of the cash flow expected from that particular share. To get the intrinsic value of the share, the first step involves discounting of cash flows generated by the shares, by the use of an acceptable discounting rate, k. Therefore, by using dividend discount model, the intrinsic value of Ford stocks can be obtained as follows (Damodaran and Aswath 677);
V=D1/(1+k)+D2/(1+k)2+……+ Dn/(1+k)n
For long term investors, the formulae above will be used to determine the intrinsic value of their shares. D in this formula refers to dividends paid, k refers to the expected return and V is the intrinsic value of the shares.
Assuming an investor bought 2000 shares of equity from Ford Motors Company, at $10.01 per share. This will give that investor a value of $20,200. The divided paid were $0.19796 for each shares held by the investor. Therefore, the dividend yield will be equal to 1.96%. This gives that investor a total of $395.95 in dividends. Assuming k to be equal to 10%, the intrinsic value of the Ford motors will be given as below, with assumption that constant dividends are received consequently for two years.
V=0.19796/(1+0.1)+ 0.19796 (1+0.1)2
=0.19796/(1.1)+ 0.19796 (1.21)
=0.1800+0.1630
=0.3436 Therefore, the intrinsic value of the stock will be $0.3436.
Determination of the Market Value of the Stock Based on the Intrinsic Value Calculated Above
The market value of Ford motors shares is $10.01 while the intrinsic value of the company’s share is $0.3436. It is observed that the market value exceeds the intrinsic value of the company’s share. This therefore means that the company’s shares are over-valued.
Recommendations
From the above observation the value of Ford share is quite above what it should be. The main reason for this may be due to the returns expected by investors which exceed the returns that the company is able to pay to investors by a large margin. Therefore, the company’s stock should trade at a price below this. Any investor who might invest in these shares at this time will be paying more than what market can price for a share with similar characteristics.
As a result of this, I would not advice an investor to use his money to invest in this stock since he can get a fair deal for his money elsewhere. However, I would advice a stock holder with Ford to sell his share at the prevailing market price since he will be in a better position to get a better bargain for his investment. By selling his shares at the prevailing market price, he will get more than the value of such shares.
Works Cited
Damodaran, Aswath. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. New York: John Wiley & Sons. 2012. Print.
Monks, Robert and Nell, Minow. Corporate Governance. New York: John Wiley & Sons. 2011. Print.
Montier, James. Value Investing: Tools and Techniques for Intelligent Investment. New York: John Wiley and Sons. 2011. Print.