Investopedia Advisor submits: I like Ford Motor Company (NYSE:F). Yes, I like Ford based on the obvious contrarian rationale – because so few do. Of course, current investor aversion alone is insufficient reason to like any investment. I like Ford for other reasons as well.
To be sure, the reasons to dislike Ford are legitimate and well-documented: The automaker posted a $797 million loss in North American operations in the second quarter, running the total to $1.1 billion for the year. Sales of its F-series trucks, a mainstay of its automotive profits, tumbled 9.7 % in June and are down 2 % this year.
On the financial side, Ford’s $150 billion debt is near junk status, its dividend has been halved, its stock is trading at a 14-year low, and it’s expected to burn $3 billion of its $23 billion cash horde this year.
Other reasons are illegitimate and, therefore, unpersuasive. To wit: Ford doesn’t sell vehicles people want. Fact is, Ford posted $178 billion in sales in 2005, twice as many as Honda (NYSE:HMC) and putative General Motors (NYSE:GM) savior Carlos Ghosn’s Nissan (OTCPK:NSANY).
Despite $3-a-gallon gasoline, Ford’s F-150 trucks are the still the world’s best-selling vehicles.
Another illegitimate reason is the exaggerated fear of the industry’s 500-pound gorilla, Toyota (NYSE:TM). Make no mistake about it, the Japanese leviathan is formidable, posting trailing twelve months earnings of $11.8 billion. And while Ford sales slid in the first half of 2006, Toyota’s rose 9.8 %.
But Toyota isn’t perfection incarnate. It recently recalled 420,000 vehicles globally, including some Echo and Prius models sold in the U.S., over a faulty engine part. Toyota is also readily beatable on the highly competitive racetrack.
Despite spending $500 million annually on its Formula One racing effort, Toyota has yet to win a race and is consistently bettered by smaller, lesser-funded rivals Renault, Ferrari, and DaimlerChrysler’s (DCX) McLaren.
The question isn’t whether Toyota or other profitable auto manufacturers are better run than Ford; the answer is obvious. The question is, what is the margin of superiority, and what are the odds that the margin will be maintained? To answer this question you need to discern the product from the investment.
Consider this: Lowly Fiat (FIA), the automotive archetype of manufacturing ineptitude and shoddy workmanship, has been one of the top automotive performers over the past two years. Why? Fiat is improving and has more room to improve than its competitors.
And so does Ford, which has risen from even deeper abysses than the one it currently finds itself. Chrysler wasn’t the only U.S. automobile manufacturer teetering on bankruptcy in the early 1980s. Ford was too as sales for Granadas and LTDs languished during a time the Japanese flooded the market with reliable, economical vehicles.
Ford’s response, unlike Chrysler’s, which was to importune the federal government for a billion-dollar loan, was to hit the design board. The result: the Taurus, the best-selling automobile through the late 1980s and much of the 1990s, and a reversal of fortunes.
F 1-yr chart:
By Stephen P. Brown, Contributor - Investopedia Advisor
At the time of release Stephen Brown did not own any shares in any of the companies mentioned in this article.