The U.S. auto industry appears to be moving back into the fast lane, and Ford (F) is America's pace-car. True, shares of Ford have been in a holding-pattern, generally from the mid $9 to around $14 range since early 2011, but there are some favorable signs for the road ahead. Ford share price hit its high of $18.88 in January 2011 marking a steady and impressive ascent from prices of under $2.00 in March of 2009.
The near two-year climb was no accident. The company was re-establishing itself. The explanation was more macro-anecdotal than a case of merely reading the numbers. Macro-anecdotal is simply the big story. Ford's big story was two-fold: making vehicles people actually want to buy, and the arrival of CEO and president, Alan Mulally. He came to Ford after 37 successful years at Boeing.
When Alan Mulally arrived at Ford headquarters in the fall of 2006, the company was loping along on four flat tires. It was not alone. GM and Chrysler also were trying to pull rabbits out of hats to stay ahead of the game. The shared problems included bloated, bad inventory; sales based more on selling money in the form of incentives and low-interest financing than selling cars and trucks; and locked-in excess production in order to feed the multi-headed monster of unionized payroll demands and too many factories struggling to justify their existence. The bumpy road was about to get worse.
Decline and fall
The American auto industry began shooting itself in the foot going all the way back to the 1980's. Mistakes over the years were destined to catch up. Chrysler was producing an inferior product, and nearly went under until its no-nonsense great promoter, Lee Iacocca took over. The strength of General Motors as the dominant American auto manufacturer produced an arrogance that allowed it to throw out such inexcusable product as the Cadillac Cimarron, a cheap dress-up of its entry-level Chevy Cavalier, and the grotesque flagship Seville of the early 80's. The Seville's horrendous diesel motor, or the laughable "4-6-8" engine were as bad as the Seville's poorly designed, down-sized standard eight-cylinder aluminum engine with its paltry 40,000 mile life expectancy. GM was embarrassing itself.
While America continued relying on its "you can't touch this…" market-capture, the Japanese were measuring that same market with far more consumer sensitivity. Along came those little Toyotas, Hondas, and Nissans slipping onto American driveways. The Big Three realized a Big Problem once they realized some unexpected competition was targeting the market with quality and affordability. Even high-end European imports felt the scare once Acura, Lexus, and Infinity appeared in the United States 1986-1990.
Sinking U.S. market dominance could not withstand the overall economic disaster of 2008. As everyone knows, GM and Chrysler had to survive at the mercy of the government TARP bailout. Ford, on the other hand, had their privately-borrowed funding already tucked away. New CEO Mulally went to the banks in November of 2006 to make a successful pitch that ended up securing $23.6 billion to restructure the company, and to be prepared for unforeseen "rainy day" events. The company was fortuitously positioned so that it would not need car czars and government outsiders trying to run its show. Quoting from a New York Times article of April, 2009, Merrill Lynch analyst John Murphy said in an investors' report: "We believe this foresight to strengthen the company's balance sheet is what has separated Ford from its cross-town rivals during this economic downturn."
There is more to the story, but the central point is that public perception of Ford was very good while that of GM and Chrysler was not. And the perception was not unfounded. There is no overestimating the value of leadership. Ford's hands-on leadership under Mulally resulted in strategic management of company finances, production efficiencies, and quality manufacture of cars and trucks people wanted to buy. The beat goes on. Ford has paid down massive debt, reduced per vehicle labor costs from $75 an hour to $55 an hour, started paying dividends once again, and now generates plenty of cash.
A Net Result
That is Ford's story. At least for now. As long as they keep doing things right, they are a company worth investing in. Ford withstood the American auto industry sales declines from 16 million vehicles in 2006, to 13.2 million in 2008, and down to 9.6 million in 2009.
The industry's recovery is now well underway. The selling rate rebounded to 14.47 million vehicles in 2012, and is currently at 15.52 million for 2013, based on the seasonally adjusted annualized rate (SAAR) according to the Automotive News. Industry sales rose by 3.7% from February 2012, and Ford had its best February (2013) in six years, according to Morningstar. The company is increasing its second-quarter production by 9%.
Fourth-quarter revenue was better than expected, totaling $36.5 billion. In North America, where Ford is at its best, fourth-quarter 2012 earnings increased by almost $1 billion to $1.9 billion over fourth quarter 2011.
The latest challenge is to offset losses from the European market. In 2012 Ford reported a loss of nearly $1.8 billion out of Europe. This was not a breakdown in company performance; rather, the result of continuing problems from the eurozone. The company sees a continued recession for the remainder of this year, but thinks it will probably bottom-out at year's end. To combat the euro-dredge Ford will attack the problem with the same down-scaling and efficiencies strategy that brought North America success. In a Reuters article Jefferies analyst Peter Nesvold is quoted as saying: "One has to believe the shares have tremendous upside if Ford comes even close to replicating its North American restructuring success in Europe."
If good leadership at the top makes for success, there is the ironic comparison that Alan Mulally is to Ford what Ulysses S. Grant was to Lincoln (not the car). It is an investable comparison.