Having a product that the market desires, such as Apple's iPhone, makes being the CEO of the company a little easier. You won't have bond holders breathing down your next for their next payment, nor will you have stockholders becoming unruly because share prices are stagnant or even worse plummeting. But this article isn't about the comforts of CEO's running high flying tech companies or cash hoarding behemoths paying juicy dividends. No, instead I'll be detailing the story of Alan Mulally, CEO of Ford Motor Company (F), and how his arrival in the automotive industry started a renaissance within the American auto manufacturer
In 2005, Ford was on a self-destructive path to collapse. The company's share of the market was being slowly devoured by rivals Toyota (TM), Honda (HMC) and Nissan (OTCPK:NSANY). All three credit rating agencies, Moody's (MCO), Fitch and S&P (MHP), between 2005 and 2006 downgraded the company's credit rating multiple times to the point where it's debt could have been included in many "High Yielding Bond" funds, which we all know is a mere euphemism for junk. The side effect of such downgrades, higher borrowing costs, further weakened the financial stability of the company.
Furthermore, the former CEO, William Clay Ford Jr., had led the company down a path of poor decisions. The company made the announcement to kill the Taurus model, which had previously been a top selling car in America, and replaced it with the bulky Ford Five Hundred. The Five Hundred lacked appeal, paled in comparison to the legacy of the Taurus and ultimately under achieved both company and market expectations. It was clear that if nothing was done, Ford would soon be producing
His task, ubiquitous; turn the company around to avoid collapse, revamp the majority of outstanding models, streamline production, and in a nutshell, rejuvenate a lost company. Alan Mulally has done just that.
Mulally was dumbfounded to say the least when Ford decided to end the reign of the Taurus and one of his first moves after taking charge was to reinstate the former best selling vehicle. The next matter Mulally deemed of great importance was putting management's focus back on Ford.
The company owned Aston Martin, Volvo, Jaguar, Land Rover and had a stake in Mazda (OTCPK:MZDAY), all of which Mulally sold off. Ford's Volvo ownership was sent overseas to China where Geely Holding Group (GELFY.PK) purchased the company for $1.8 Billion. Land Rover and Jaguar ownership rights were sold to Tata Motors (TTM), an India based auto manufacturer. Ford divested itself of its Mazda stake for around $185 Million, which was bought back by Mazda Motor Corporation. While the company only received in total approximately $2.3 billion in the sales, Mulally believed that the attention of the company had been diverted to numerous makes and models, to the point that the company couldn't concentrate on creating a solid line of Ford branded vehicles.
A third, and potentially the biggest gamble he's taken as CEO, was to mortgage every asset the company owned to shore up the company's balance sheet. In his own words funds would be "a cushion to protect for a recession or other unexpected event." This comment was made in 2006 and we all know the financial misery that occurred in the ensuing years. While the company may not have been bailed out by the government, the company did receive billions in advantageous, low interest loans which were used to overhaul the production line which now offers a few of the older models that have been reinvigorated, as well as a few new lines. The Ford Fusion and Fusion Hybrid now rivals the Toyota Camry Hybrid, and the Ford Focus has found a spot competing against the tried and true Honda Civic.
One division which the company did hold onto was Lincoln, the luxury sedan/SUV brand. While the innovations and enhancements to the Ford branded vehicles came, it was in my opinion that the Lincoln brand got left behind. Sales dwindled and Lincoln quickly became what seemed to be an afterthought. Fortunately the car maker has realized their lack of competitiveness in the luxury segment and has revitalized the Lincoln sedan and crossover. At the 2012 North American International Auto Show Lincoln debuted a sedan that included accents from previous Ford brands Jaguar and Aston Martin. While Lincoln remains a division of Ford, the company had a distinct team apart from the Ford design team craft the MkZ, so as to bring a fresh experience and truly separate Lincoln as being the luxury class car that it is meant to be. Despite a small mishap, the initial reaction at the show was generally positive and with a price point below that of the Lexus ES 350, Infiniti G Sedan 37 Journey, and the Cadillac CTS (GM), I am looking forward to what the Lincoln brand is capable of moving forward.
Alan Mulally however, could not stop at just repairing the company's balance sheet, realigning the company's vision and revitalizing the Ford and Lincoln brands. No, if Ford was to once again become the truly American company that it once was, if it was going to show investors that the company had returned from the grave, Ford would need to reinstate the dividend it had cut not all that long ago. Sure enough, after raising revenues and seeing some of the most profitable years in the company's history, CEO Alan Mulally was finally able to announce to shareholders what they long awaited to hear. During their most recent conference call with analysts and investors alike, Ford announced that the dividend, after taking a 5 year break, would once again be paid to investors, albeit at a half the original amount.
While the company has announced that CFO Lewis Booth and Ford's Global Product Chief, Derrick Kuzak, have retired, Mulally has insisted that he "has no plans to retire and is thrilled and honored to serve Ford." Given the display of character and competence by Mulally, I have no reason to doubt that the CEO is working to develop a team of executives who are capable of replacing the retired executives, as well as making a smooth transition for when he retires, if and when that occurs.
To see the potential for success in Ford stock, I believe one of the best measurements that can be used would be an analysis of the company's future free cash flow. It follows logically that an investor should never pay more per share for a company than what the company will earn itself in the future years. Current analyst estimates for Ford's revenue growth include an approximate 14% growth over the next year. That exuberant number however quickly gets extinguished with most analysts coming to the consensus that the company's stable revenue growth for perpetuity is more likely to be around 5%. It is in my opinion that while the 14% growth is not sustainable over the long term, it will take a year or two for that to dwindle down to the stable consensus growth rate. With that being said in my DCF analysis I'll use a revenue growth rate of 14% for 2012, 9% for 2013 and 5% for 2014 and from there on after. With regards to the company's cost of goods sold (COGS), I believe the company will benefit from recent UAW negotiations and will ultimately see COGS, as a percentage of revenue, fall below their 5 year average of approximately 91% to 86%. Finally, based upon the structure of Ford's debt and equity, I will use a weighted average cost of capital (GM:WACC) of 9% to discount the company's future earnings. It is based on these numbers that I arrive at an estimated "fair value" of $16.40/share. Given it's position in the domestic auto market and the company's ambitions for foreign markets, I believe Ford can trade at a 10% premium to this "fair value". The $16.40 price target sets the stocks potential appreciation at approximately 28.7% while the $18/share price target ($16.40 + $1.60=$18) represents a potential stock price appreciation of 41.3%.
It is with great confidence that I recommend Ford Motor Company as a Buy for anyone considering purchasing a specific auto maker, or simply looking to diversify their portfolio. For myself, I stand firm my price target for Ford at $18/share by the years end. Furthermore, contingent on 2012 revenue growth, I believe Alan Mulally will continue to show his commitment to investors by increasing the dividend during the first half of 2013.
Additional disclosure: I am Long Ford using the 2013 Call options and will look to augment my position on market dips.