Shares of Ford (F) have been a solid performer in 2013, rallying over 28% as Europe improves faster than anticipated and margins improve worldwide. However, share gains were concentrated in the first half of the year, and over the past four months the stock has been stuck in the mud. It is not as though all stocks have struggled over this time period with the S&P reaching a new all-time high. Main competitor General Motors (GM) has also seen its shares hit new highs while Ford has languished between $16.50 and $17. Shares of Ford have been stagnant ever since rumors began to swirl that CEO Alan Mulally was a leading contender for the top job at Microsoft (MSFT). In the views of most, Mulally has been a transformational leader who brought Ford back from the abyss. With his departure possible are shares of Ford no longer worth owning?
When it comes to determining whether investors should be bullish on Ford after Mulally, it is important to recognize his value to the company. If you believe he's been a fine but not exceptional leader, there really is no need to be concerned about his departure, and you should hold the same view of Ford after he leaves as before. If on the other hand you believe he was an exceptional CEO, I can see there being cause for concern when he leaves. I fall into the latter camp and think he may very well be the best CEO of the 21st century (only Steve Jobs can compare in my book). Nonetheless even with my positive view on Mulally, I don't believe his departure is reason for investors to be concerned.
To be a truly great leader, one must do two things: achieve tremendous success during your tenure and set the organization up for your inevitable departure. Alan Mulally has done just about everything right during his tenure: adding debt in 2007 to prepare for the recession, striking a deal with the UAW, cutting capacity in Europe, and developing a One Ford culture and strategy. To think Mulally could not build a roster of strong successors would fly in the face of his history of doing things well. If you believe in his track record, it would follow that he has able leaders in the waiting.
Moreover as much as we like to credit (or blame) the guy at the top, no person can single-handedly turn around a company with $150 billion in revenue. While he can set a new strategy and try to build a new culture, there must be buy-in and execution throughout the corporation. Individuals like Mark Fields and Mark Schulz have done fantastic jobs and would be strong CEO-choices. Mulally has fundamentally changed Ford's culture as it has gone from a fragmented company to one where each operating unit works together and collaboratively. This philosophy is embodied in One Ford where the company is working on building cars that can be popular globally rather than just in individual markets.
Mulally has done a fantastic job building this company; it makes no sense to believe he hasn't done a great job building a strong roster of talented leaders. Of course all things equal, I would prefer to see Mulally stay, but I don't buy the theory that Ford is doomed to regress without his leadership. He may very well get tapped as Microsoft's next CEO. If that is the case, he likely will be gone from Ford by the end of January. However, he is 68 years old. Even if he stays at Ford, Mulally will be leaving at some point. My guess is that he will retire by the time he is 70 or August 2015, though the end of 2014 also seems rather plausible. In other words by the time the Microsoft speculation ends, it may well be time to start speculating when Mulally will retire from Ford.
Mulally has built a strong team at Ford that can continue the work he is doing. Equally important, his successor will be inheriting a far different company than Mulally. Ford is operating exceptionally well. I expect One Ford to translate to an increase in operating margins of 100bp over the next two years while Europe should be profitable in 2014 thanks to significant capacity cuts. The company is finally gaining a foothold in the emerging markets, and Ford is doing as well in the U.S. as it has in a generation. Unlike 2007, no wholesale changes are needed. It really is a matter of keeping Ford on course and making incremental adjustments.
While many companies with stellar CEOs often get a management premium, it seems like shares of Ford are suffering a "great CEO is leaving discount." I am looking for Ford to generate $1.80-$1.90 in profits next year, meaning shares have a 9x multiple. Shares are basically pricing in that Mulally's successor is going to screw something up. The bad news is more than baked in at this point, and even a conservative 12x multiple would send shares rallying 30%. With growing earnings and cash flow, Ford is poised to raise its dividend again in 2014. I would look for another $0.05 increase to $0.15, and we could start to see some sizable buybacks towards the second half of the year.
I can see the impulse to sell Ford with rumors of Alan Mulally leaving, but I believe that is the wrong thing to do. If you believe he has been a great CEO, you have to believe he has done a good job building his team, and operational results suggest that. Moreover, shares are pricing in an operational slip-up, meaning the risk is to the upside not the downside. Whether he leaves in one month or eighteen, Mulally will not be the CEO of Ford forever, but he has positioned the company to grow beyond his tenure. At 9x earnings, Ford is a great buy. If he does decide to leave, I could see their being a knee-jerk sell-off. Investors would be wise to buy more shares on that pullback because Ford is powered to rally beyond $20 in 2014 thanks to its transformational CEO.