General Body Meeting 10.20.10. Mutual Investment Club of Cornell Agenda Announcements Headlines Ford pitch Quant team commentary 2

General Body Meeting 10.20.10

Mutual Investment Club of Cornell

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Agenda

Announcements Headlines Ford pitch Quant team commentary


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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 10th

MICC social event to be announced soon


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Headline 1

David Shim


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


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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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Headline 2

John Yoshida


Technology Sector Earnings

Earnings Announcements Intel

Strength in corporate demand and emerging markets

Google Continued core strength…

Apple Competition ahead


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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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Headline 3

David Wong


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Investment Bank Q3 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


Ford Motor Company


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Business Description

Ford is 4th 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)


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


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Growth will come from Emerging Markets


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


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Thesis: A Return to Sustained Profit

• Great management

• 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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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


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”


Ford Management


Volvo Divestment

Ford made deal in December to sell Volvo

Volvo will be sold some time in 2010 This should free up some capital



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.


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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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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-1980s as the first successful Big Three counterpunch to the Japanese dominance of mid-sized cars, and had sales averaging in the 400k-500k range for much of the 1990s (including the look-alike Mercury Sable).


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.


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.


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.


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.


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.


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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, 4th 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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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


Product Innovation in India

Ford Figo Manufactured in India Launched Tuesday at very low price

$7,690 Designed for India Larger, more expensiveThan Tata Nano


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


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Profitability through successful restructuring (Operating Margins)


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Resilient Earnings Power


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Ford Outperforming (Sept. US Auto Sales)

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


#1 & Still Growing


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Income Statement: A Return to Profit


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Successful Strategy=5 profitable quarters


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Income Statement: Improving Margins and Surging Earnings


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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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Strong Cash Flow-Paying off Debt


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Balance Sheet- Increasing Equity


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


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


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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


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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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Current Share Price = $13.32


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


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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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Technical Analysis


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Quaneam Analytics


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Quaneam 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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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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Prediction

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


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Proposal

No hedging

Buy puts Protect short-term downside indicated by technicals


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Thanks for coming by

Documents

General Body Meeting 10.20.10. Mutual Investment Club of Cornell Agenda Announcements Headlines Ford pitch Quant team commentary 2