Last week, the recovery of the auto market in the US continued on as a number of carmakers posted double-digit growth once again. There were also several other interesting developments surrounding Ford (F) in the last couple weeks. In this article, I will summarize some of the latest developments and add my take on those developments.
On August 29th, Stephen Odell, the man who runs Ford Europe estimated that it would take about 5-6 years for the European car industry to fully recover. In 2013, carmakers will sell a total of 13.5 million vehicles in the continent, significantly down from the 17 million vehicles sold in 2007. In comparison, 14.7 million cars and trucks were sold in the US last year (and the number is expected to pass 16 million this year). This is the first time in a long while that more vehicles are being sold in the US than there are in Europe. Ford expects to become profitable in Europe by 2015 and GM (GM) hopes to see breakeven soon after that. Keep in mind that I used the word "expects" for Ford and "hopes" for GM because Ford's management has been far more confident in their estimates than GM's management in the last couple conference calls. When Mr. Odell says that the European car market will take another 5-6 years to recover, he meant that it will take about 5-6 years before Europeans buy 17 million cars annually like they did prior to the great recession, but that doesn't mean it will take Ford that long to post a profit in the continent.
Should Investors Worry About A Recall?
Ford will be recalling 370,000 vehicles such as Crown Victorias, Mercury Grand Marquis, and Lincoln Town Cars that were manufactured between 2005 and 2011. Last week, this worried some of the investors but there isn't much to worry about this recall. These days, Ford is well-prepared for events like recalls because it keeps a separate cash reserve to handle the extra costs. When a car gets recalled, the costs are usually covered either by the car company, the part supplier or both. If the cost of recall is much higher than planned, there are special types of warranties or insurances which cover the cost. Having said that, it is safe to say that the recall will have a minimal impact on Ford's net income in the next quarter, if any. If Ford had failed to recognize the problem and recall the vehicles and if the problem led to accidents, then there would have been some lawsuits and huge costs involved. While this rarely happens, it hurt Toyota (TM) badly in the past when it agreed to pay $1.6 billion in settlement.
Strong Month of August
Ford's August numbers were very strong, which didn't surprise anybody. The company saw the sale of its Ford brand vehicles increase by 12.7%, while the company's truck sales increased by 18.4% and car sales increased by 17.5%. Lincoln sales were up by 0.6% which is a nice surprise for the investors because the expectations were set very low for this brand. The company is boosting its production to 785,000 vehicles in the fourth quarter following 740,000 units in the third quarter. The company's strong volume came at a time its incentives were falling, which should help the margins greatly.
Ford's Credit Rating Gets a Bump
Furthermore, S&P upgraded Ford's credit rating from BBB- to BB+. With this move, Ford continues to ascend well into "investment grade" status. During the great recession, the company's credit rating was in "junk grade" and it took the company a while to gain its investment grade status back, but the troubles of the past seem to be behind the company by now. Ford's balance sheet is improving greatly, which has always been one of Alan Mulally's biggest priorities at the company. Having a strong credit score is important for Ford even when it can finance its operations from its cash reserves, because Ford operates its own credit company (Ford Credit) and as long as the company can get its hands on cheap credit, its vehicles will be more affordable for the buyers and leasers, and the company will continue to generate extra income from the credit business.
Is Alan Mulally Leaving?
According to a report by Reuters, Ford's board is said to be willing to let Alan Mulally go earlier than planned if he desires to leave the company. A couple weeks ago, I wrote an article suggesting that Mr. Mulally would stay with the company at least until Europe is profitable for Ford because he takes pride in successful turnaround stories. I am sure that Mr. Mulally is fully committed to serving Ford for as long as he can and he has the backing of Ford's board for as long as he wants to stay at the company. The report of Reuters claimed that Mr. Mulally was presented with "another high-profile job to follow up his tenure at Ford." Now this is something that really surprised me. I always thought Mr. Mulally would retire after his tenure with Ford is over; however, he might be ready for another challenge outside of Ford.
I will just speculate here and take this with a grain of salt, but I could see a company like Microsoft (MSFT) approaching Alan Mulally. Prior to taking the helm at Ford, Mr. Mulally used to live in Seattle and he was building a house there to spend his retirement. Now, I know that Microsoft's main office is not located in Seattle, but it's close enough. Alan Mulally personally knows several influential people at Microsoft, such as Bill Gates and Stephen Ballmer, as they worked on several projects together over the years. What I'm saying is that it would not surprise me if Microsoft approached him with an offer to run the company. On the other hand, I don't know if he would be interested in running the company. If Mr. Mulally became the CEO of Microsoft, the company's stock price would probably double within weeks, but this is probably not a strong possibility because Mr. Mulally seems to be very happy with his role at Ford. At the age of 68, Mr. Mulally is full of energy, wisdom, charisma and youth.
Ford continues to do well in US and the recovery is underway in Europe. As Mr. Mulally runs the company successfully and its balance sheet improves, the company's credit rating improves and this will help the performance of Ford even further.