By Mark Bern, CPA CFA
As I was talking to Alan on Monday…
I was actually privileged to be included in an interview of Mr. Mulally conducted by Seeking Alpha Editors Yigal Grayeff and Yosef Levenstein and another SA Contributor, Brian Nichols. Mr. Mulally had a story to tell and he presented it, as could be expected, with great compassion. The full interview transcript can be found here.
There were several things that I gleaned from the conversation that especially stood out for me. I’d like to share my perspective with the investment community of Seeking Alpha.
First off is the “One Ford Global” strategy. As you may already know if you have gone to Ford’s (NYSE:F) website, this strategy calls for development of a full family of vehicles from top to bottom that are first in class, all on a total of just 9 platforms, with diesel, petrol, hybrid, plug-in electric and all electric power trains available and all built on the same production line for each platform (if I understood him correctly here), and all of which will be offered globally. The results of the last three years have been impressive, yet based upon the stated goal Ford is just getting started in creating that vision. The company still has a long way to go to make all of this a reality.
Many readers have wondered why Ford, with global economic growth apparently slowing, continues to drive ahead so aggressively with its capital spending, hiring and expansionary efforts. According to Mr. Mulally, the reason Ford has done as well as it has during some of the slowest economic recovery on record is because the company has remained completely focused on the strategy, improving its products and creating greater flexibility in its manufacturing processes that enabled dealers to have the models customers wanted in inventory. That hasn’t always been the case at Ford.
As recently as 2005, dealers took the inventory corporate wanted them to sell whether customer demand was there or not. That practice resulted in discounts and falling margins for the dealers. Today, the company focuses on delivering models that customers want to buy in the best possible product mix to support dealer sales. I took some time to interview some local Ford dealers that I’ve known for years. The difference in their enthusiasm today compared to what it was in 2005 was palpable. Maintaining that enthusiasm in the dealer network will play a crucial part in making the sales increases that Ford envisions a reality. Mr. Mulally has the dealers 100% behind him. For as long as he remains at Ford’s helm I believe the enthusiasm can be maintained.
The company projects global unit volume to increase from 5.3 million vehicles in 2010 to 8 million in 2015. The other impressive statistical goal is the improvement of operating margins from 6% to 8%, also by 2015. One interesting thing to note is that the One Ford Global strategy will probably not be fully implemented by 2015, meaning that further improvements should also be expected post 2015.
The other reason that dealers are happy is that, according to Mr. Mulally, Ford franchises are at the highest values ever. That also portends expectations of more good things to come.
The plan is ambitious. The company still has a long way to go in implementing the plan across all platforms globally. But I like it. I see a great deal of potential savings from reducing the number of platforms and having the ability to build vehicles with multiple power trains on the same production lines, both from materials and from labor. Standardization of platforms and fewer variables that need to be measured and tested should also improve Ford’s quality control capabilities.
You may ask how Ford can determine whether their vehicles are best in class or not. Mr. Mulally’s answer was provocative: all members of the leadership team are required to drive various different competitors’ vehicles nightly and then compare everything about those vehicles to Ford vehicles which they also drive. The company’s executives are not hiding behind the corporate line. Each one is evaluating vehicles of all makes regularly and keeping aware of what the company is up against at all times. I think that speaks volumes to Ford’s commitment to improving quality. It also sounds like a lot of fun!
From a personal perspective, I find that Ford is doing a lot of things right and that forging ahead is the only way to get to where the company plans on being. Holding back because of economic uncertainty is the path taken by the also-rans. To be great, a company needs to have a plan that will carry it through good times and bad and have the determination to stay the course in the face of difficulties. So far, so good. But can Ford deliver consistently regardless of the economic stage in which it finds itself? That question will be answered in the next major recession. There are still questions to be answered that only time will tell. The biggest perhaps is how long will Mr. Mulally stay at Ford. The only answer he would give us during the interview was that he, himself, was very happy at Ford.
Regarding Ford’s debt and questions posed by SA readers, I would consider it foolish for Ford to pay the debt off completely, especially when interest rates are at historical lows and in light of so much economic uncertainty around the globe. The company may need the excess cash it has built up in order to weather the next recession. The cost of the debt is likely to be less than the long-term rate of return the company can achieve on its capital investments. Without the continued capital investment, Ford would not be able to achieve the milestones in its strategic plan. And falling behind on its strategic plan would result in not gaining competitive advantages that the company is focused on achieving. That would give competitors a chance to make up lost ground and retake market share. I believe that the company has maintained a reasonable balance between its debt and the building of cash. I feel confident that the company is in a solid position to withstand whatever the next two years brings while continuing down the path toward becoming a great company. I withhold the label for the time being, but I believe that Ford is heading in the right direction to earn that plaudit in the future.
Unless there is a change in leadership, I believe that Ford will continue to makes strides in improving its sales and its margins, an equation that should result in future success. If you already own Ford stock, I’d hold onto it. If you don’t, I’d recommend waiting for a dip to around $11 to get a better entry point. Ford’s bonds may also have some potential upside over the next few years as the credit rating continues its ascent. But again, I’d wait for a dip since it is so soon after the recent ratings increase. Wait for some bad news or a market correction. One or the other should come about before these issues go much higher.
Those who have read my articles before will understand when I say that instead of buying the stock outright my preference is to write puts on the stock to get it at a discount. My favorite put option to sell (to open the position) currently is the May put option contract with a strike price of $12 and paying a premium of $0.75 per share. If the stock falls below $12 and remains there through May 18, 2012 we would be obligated to purchase the stock at the strike price of $12 per share.
Including the premium received we would have a cost basis of $11.25 per share ($12 strike price - $0.75 premium received). If we don’t get the stock we just collected $0.75 per share for 5.4% return on the cash we would be required to hold in our investment account to secure the puts. If you would like more detail about the process for using puts as a substitute for placing limit orders (get paid for placing orders) please refer to an article I wrote about another company that explains the process in detail. The article also covers the risks and relevant mitigation strategies.
Below are links to the other articles in this series:
- For the interview transcript click here.
- For Brian Nichols' article click here.
- For Yigal Grayeff's article click here.
Disclosure: I do not hold a position in any of the stocks mentioned