Efficiency is often an overlooked criterion within the investment world. Sure, people turn to margins and measure how much they are shrinking or expanding by, or look at the rate of which the growth is rising or falling. But one criterion that is almost always overlooked is the efficiency per employee. In this article, I will attempt to shed some light on the efficiency of Ford (F) and its competitors, as well as the broader S&P 500 (SPY).
In an attempt to boost employee morale and looking to increase future sales, Henry Ford, the founder of Ford Motor Company, made a drastic move:
In 1913 Henry Ford made a bold move and literally doubled the wages of his employees from $2.50 to $5 a day, after the huge success of the Model T doubled his profits. By sharing the wealth, Ford saw a tremendous surge in output and skyrocketing morale among Ford workers. In addition, the $5 wage permitted his workers to buy cars for the first time, helping to fuel demand. -- Our Nation's Most Critical Number
Although I don't think present-day Ford would do something such as to double the current employees' salary, I think it has a similar approach to keep quality, morale and output all very high: profit sharing. In the new deal with the UAW (United Auto Workers), Ford will pay out $1 per employee, for every $1,000,000 in pre-tax, pre-interest profit. For the fiscal year of 2012, Ford earned $8 billion in pre-tax, pre-interest profit, allowing each eligible employee to collect an $8,000 profit-sharing bonus. Not too shabby.
The full details of the current deal can be read, here.
If it worked when Henry Ford did it, perhaps it will work again - profit, that is. When articulating the data from Ford, it was quickly noticeable that it had one of the highest per employee statistics. For instance, Ford has the highest revenue generated per employee in its industry, with $807,341. Below is a look at some of Ford's competition, as well as the industry and the S&P 500.
Revenue Per Employee
General Motors (GM)
Source: MSN Money
As you can see on the table above, Ford has the highest revenue generated per employee. The next closest competitor is General Motors, which generated $78,170 less per employee than Ford. When compared to the S&P 500, Ford generated 87% higher revenues per employee, a substantial figure to say the least.
Let's turn to income per employee and see if that's any different. After all, what good is revenue if you can't turn that into profit? Below is the same table with the same companies, but this time will account for income per employee.
Income Per Employee
Source: MSN Money
The only difference with this table and the one above, is Ford's inability to beat the S&P 500 average income per employee, which is $60,867. However, Ford did edge out the industry average, as well as the other top three automakers. General Motors was again, the second best performer in the table above, but quite far from the $34,756 that Ford generated as income per employee.
The last comparable statistic I want to take a look at is inventory turnover. The inventory turnover ratio displays how rapidly, or how efficient, a company is at moving its products from the warehouse to consumers. A low ratio would potentially indicate that a company performs this task quite inefficiently, whereas a higher reading would potentially indicate that this company is good at keeping inventory from piling up. Below are the results:
Source: MSN Money
In the auto industry, an overstuffed inventory is a bad thing, because it will cause the manufacturers to offload the vehicles at discounted prices to make way for the new year's models. However, having an extremely low inventory could be bad too, meaning that there might not be enough cars to meet demand. The good thing about this is that demand is high, meaning your vehicle is what consumers want. The bad news would be that without any vehicles in stock, consumers may look to someone else (a different manufacturer) for an alternative model. So inventory management is extremely important, and it would appear that Ford maintains that efficiency very well.
While there are other things to consider than just the revenue or income generated per employee, or the inventory turnover rate, it certainly is something to look at when making an investment in one of the above-mentioned companies.
Of the four companies, I like General Motors and Ford. But if I had to only pick one, it would be Ford, hands down. I really like that the company did not receive a bailout, is an American company, and has a plethora of positive catalysts moving forward, including a recent doubling of the dividend and plans to contain and reduce the impact of the current European losses. I am long and remain bullish on shares of Ford.
For a deeper look at some of these positive catalysts from the previous couple of months, check out my Seeking Alpha article, Ford: After The Pullback, Should You Hold 'Em Or Fold 'Em?
Disclosure: I am long F.