A class action lawsuit was filed Friday (3-28-2013) in federal court against Ford Motor Company (NYSE:F). The suit alleges that the electronic throttle control systems in many Ford models manufactured in 2002 through 2010 are vulnerable to unintended acceleration. The suit lists over 30 models including Ford's F-series pick-up trucks which are the best-selling vehicles in the United States. Specifically, Ford F-series pick-up trucks manufactured from 2004 through 2010. Other popular models including the Ford Taurus, Ford Mustang, Mercury Cougar, and Ford Explorer are part of the suit.
The main issue is that Ford installed a brake override system on many Ford vehicles sold after 2010 in the North American market. This device stops the accelerator when the brake pedal is engaged even if the gas pedal is engaged as well. For instance, if the gas pedal is stuck at full-throttle and is pinned in place by a floor mat the driver can hit the brake to stop the car as well as override the accelerator effectively "taking his foot off of the gas".
The suit claims that Ford was negligent for not installing these safety devices in many of its vehicles manufactured during the 2002 through 2010 period. Also, the suit claims that many vehicles manufactured by Ford during this period were "defective" because the vehicles lacked the critical brake override system. Class members of the lawsuit are seeking monetary damages as they feel they overpaid for a "defective" vehicle.
Our worry with Ford is that we have seen a similar scenario play out before with Toyota (NYSE:TM). Toyota was essentially forced to recall about 10 million vehicles due to a similar (alleged) unintended acceleration issue in 2009 and 2010. In fact, Toyota estimated that the recall cost about $2.0 billion due to lost sales (frightened customers) and the cost of repairing recalled vehicles. This cost does not include the $1.1 billion that Toyota paid to settle the class action lawsuit concerning the unintended acceleration issue. So we are looking at about $3.0 billion in damages to Toyota due to this recall/lawsuit problem. The Wall Street Journal covers the Toyota recall here.
Surprisingly, it was never proven that Toyota did anything wrong. The recall/lawsuit was not based on science but was based on hysteria and negative public perceptions. Toyota got a huge amount of bad press and was forced to initiate the recall and settle the lawsuit to protect the value of its brand. Toyota was forced to get this problem resolved as quickly as possible and was in no position to prove its innocence.
We think that Ford is a great American company. However, given the nature of the business it operates in we would not buy or hold shares of Ford at this time. The potential damage that a lawsuit/recall (similar to the one that Toyota endured) could have on Ford should not be ignored. In our opinion, Ford has done nothing wrong, but given today's legal system and today's mainstream media, there is a small chance that negative publicity from this issue may negatively impact Ford's business.
Ford may be placed in a precarious position where it must pick the lesser of the two evils and conduct a large recall and quickly settle lawsuits just to protect its brand. We like Ford and hope this lawsuit is thrown out of court but we just cannot take the chance that this problem takes hold. If hysteria takes over, overpowering common sense, Ford investors may be in for a wild ride.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Ulfberht Capital is not an investment advisor. This article is not a recommendation to buy or sell securities. Always consult your investment advisor before making any investment decision.