Is It Time to Sell Ford?

Is it time to sell the turnaround story of the decade?

The stock of iconic automaker Ford (NYSE: F  ) has been very good to shareholders who bought during the dark days of late 2008 or early 2009. As the company has gone from massive losses to impressive profits, the stock has followed right along, rising from a low below $3 to a high near $19 not so long ago.

But since Ford missed earnings expectations in January, that stock-price trend has taken a decidedly downward turn, thanks to a sluggish economy, rising gas prices, and a sense that the company's lead over key rivals might be shrinking. Although the company's first-quarter results were very strong, its announcement on June 15 that second-quarter profits would probably come in below analysts' expectations added more selling pressure to a stock that had been meandering downward for weeks. Add in the latest from J.D. Power, which showed the Ford brand plummeting to 23rd place in its influential Initial Quality ratings, and it's hard not to be concerned.

Ford's share price has recovered a bit in recent days, but it's still below $14 as I write this. Is it finally time to think about selling?

Profits under pressure
Ford's latest guidance wasn't really much of a surprise. As controller Robert Shanks noted in that June 15 presentation, Ford management had previously said it expected second-quarter earnings to be about the same as those in the most recent quarter, and that second-half earnings would probably be lower than those in the first six months of 2011.

Why? Part of it is simply the seasonal rhythm of the auto business. New models tend to be introduced late in the year, and that's when spending for things like marketing and production-line retooling happens. As any Ford (or General Motors (NYSE: GM  ) ) executive will tell you, that leads to a predictable cycle: Strong profits early in the year, smaller ones later on.

So why the stock slump? Maybe it's just a return to normal: At some point, investors were bound to stop seeing the company as a feel-good turnaround around story and instead start to view it as it had been viewed for decades: as a cyclical industrial giant in an intensely competitive, low-margin business.

Ford's share price still has some room to grow to get to the kind of valuation it sported in the pre-bad old days, when its price-to-earnings ratio tended to hang around 10 or so (it's a bit below 8 at the moment) during good times. Assuming the economic recovery doesn't fade, I expect that a return to that kind of multiple will come as the company continues to reduce its debt and move toward the reinstatement of its dividend -- if Ford's business fundamentals remain strong.

But will they?

Worries about quality
Ford has been widely praised for its improved quality in recent years, with several of its cars and trucks outdoing rivals Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) in reliability surveys by Consumer Reports and others. That improved quality reputation has been a big driver of Ford's sales gains, particularly in the U.S. market.

And that's why the recent ding from J.D. Power should have raised the eyebrows of Ford investors. According to reports, the complaints in J.D. Power's survey focused on problems with the latest iteration of Ford's vaunted Sync feature, the do-everything "infotainment" system developed in conjunction with Microsoft (Nasdaq: MSFT  ) and Sony (NYSE: SNE  ) .

Sync has been a big sales driver for Ford, with the company saying last year that Sync was "critical or important to their decision to purchase" for 32% of customers surveyed. The popularity of Sync, which is a high-profit option on nearly all Ford models, has also had a lot to do with Ford's impressive per-vehicle profits in the past few years.

But Sync's latest iteration, which comes with a complex new interface called MyFord Touch, has proven problematic. According to J.D. Power, users reported frequent system crashes and struggles with the interface's complexity, complaints echoed in recent tests by Consumer Reports.  

It's easy to think of Sync as kind of a toy, but in truth, this is a big deal. If the problems aren't resolved soon, Ford runs the risk of having two of its key differentiators in its most important markets -- its improved quality rep and its class-leading infotainment system -- turn into liabilities. That could hit Ford's sales, and its profits, quite hard.

So is it time to sell?
Ford says that it's working on improvements to the MyFord Touch interface, and if the company can roll out fixes (quickly), that issue may fade quickly in the rearview mirror. I think that's more likely than not, and I don't suggest selling just yet.

But even though the Sync hassles may seem like a small deal, the problem comes at a somewhat challenging time for the company. Ford's key Japanese rivals are recovering from the tsunami more quickly than expected, GM and Chrysler are regaining their own product swagger, and Hyundai's fierce product onslaught continues to win market share. Competition is as intense as it has ever been, and while Ford continues to be in a strong position, maintaining that position will require near-flawless execution. Can the company put the Sync glitches in the past and continue to execute? I remain optimistic, but this will bear careful watching.

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Fool contributor John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of Microsoft and Ford. Motley Fool newsletter services have recommended buying shares of General Motors, Microsoft, and Ford and creating a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (14) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 30, 2011, at 5:55 PM, ElCid16 wrote:

    Lincoln is officially horrible. Ford is investing $1B in Lincoln, as basically a final attempt to revive the auto line.

    2011 expected total Lincoln's sold: about 75,000 - down 10,000 from 2010.

    http://online.wsj.com/article/SB1000142405270230488790457639...

  • Report this Comment On June 30, 2011, at 6:05 PM, havvey wrote:

    Lincoln may be on its way out But ford should survive.

  • Report this Comment On June 30, 2011, at 6:06 PM, jonbegood wrote:

    I think that Ford needs to have a "sensational" 2013 replacement for the current Fusion model with no tolerance or excuses for further poor execution. The 2013 Fusion must legitimately complete with the Accord, Camry, Sonata and Ultima, etc to lift the company horizons to higher ground.

    They also have to remake Lincoln into a truly world class brand competitive with Accura, Lexus and Infinity and rapidly abandon badge engineering. Lets get to it.

    Ford needs to transform itself beyond a truck company that sidelines making cars.

    Jon

  • Report this Comment On June 30, 2011, at 6:28 PM, thedonald2 wrote:

    In my opinion, the writer is wrong, as are the 3 responders. Ford is and will continue to be a fine company with a fine management, that produces fine cars. I'm in at $15 and will remain in, until Ford it's $20 plus. I expect Ford will "Live long and prosper". Sour grapes by some will not change that.

    Don

  • Report this Comment On June 30, 2011, at 6:29 PM, Riskysam wrote:

    "Hyundai's fierce product onslaught continues to win market share."

    This is the reason why ford and all the other companies are not doing so well. Hyundai is whipping them in MPG, design, and even quality. Yes Quality.

    To top it off they released their new car line a year earlier than expected. It is cheaper than the current current competition and packs in the same amenities.

    Also their labor cost is also at half that of ford, gm or even toyota. New plants in china, brazil, and continued production in alabama means more market share for this company.

  • Report this Comment On June 30, 2011, at 7:05 PM, liveoilfree wrote:

    There are always problems with software; this does not affect the fine quality of the vehicle itself. Microsoft will have to fix the bugs, as usual; Ford should have chosen Apple.

  • Report this Comment On June 30, 2011, at 7:07 PM, haidend wrote:

    The flaws with MyFord Touch are concerning considering that many consumers are buying a car as an accessory to their smart phone. But comfort is taken in the fact that Ford is the first to introduce this technology on their cars and as the other brands catch up they are going to experience the same problems. Short term problem if Ford handles it properly.

    I don't think that Lincoln is necessary for Ford to sell luxury models. If Hyundai can sell Equus without a luxury brand then Ford can too. Lincoln has a flawed brand image. Maybe its an American thing because GM did the same thing when it kept Buick, even though Buicks sell for about the same as the high end Chevrolets.

  • Report this Comment On June 30, 2011, at 8:03 PM, chadscards1274 wrote:

    The current Ford story reminds me of Peter Lynch's telling of the Chrysler issues when it was a turnaround and then went back to being a cyclical. The author correctly points out that F could go back to more like a 10 P/E but the difference I believe is there is a cyclical upswing in demand for vehicles that has already started. So look at earnings estimates 1-2 years out and apply a multiple of say 10 and see if that's a price you would like to get in the next 12-24 months.

  • Report this Comment On June 30, 2011, at 8:13 PM, spawn44 wrote:

    A radio that needs some work will have zero effect on this company moving forward. The company has made all the right moves with fixed cost reductions, Union costs, debt reduction, consolidation of platforms, Competitive new product with a quicker turnaround. Inventory control and gross margin increases and will continue this operational sytle into the future. I believe it will be the foreign automakers and the japanese that will have to worry about Ford taken their business than the other way around. This company has made a 180 degree turnaround that has not sunk into many analyists heads yet. This is not your daddy's Ford company.

  • Report this Comment On June 30, 2011, at 8:19 PM, JAVEROA wrote:

    It is a pity one cannot buy Hyundai stock on US stock exchanges (or can we?) as they are going to be huge.

    When you look at all their vehicles, they easily beat on price/quality everything out there and their warranty is unbeatable.

  • Report this Comment On July 01, 2011, at 4:54 AM, bikesncats wrote:

    I sold F a few weeks back (last week of April if I recall) when it ran passed 16$ and my decision was more based on gut feeling then anything else...but I'm glad I did sell.

    I believe F is still a potentially 17-18$ stock and I'm seriously eyeing it for a new entry point, though I do have higher priorities on my list.

  • Report this Comment On July 01, 2011, at 9:39 AM, SMOKEN42 wrote:

    MR. ROSEVAR, ANOTHER " ANALYST" BEAN COUNTER, WHO HAS COST INVESTORS MILLIONS-OF-DOLLARS IF THEY FOLLOWED HIS ADVICE ON FORD...........OF COURSE, NEW SOFTWARE IS ALWAYS A RISK, AND MUST GO THROUGH A PERIOD OF DEVELOPMENT...........JUST ASK B.M.W AND MERCEDES..........FORD IS JUST FINE, ON TOP OF IT'S GAME, AND IS BUILDING GREAT AUTOMOBILES........THIS IS A 25 DOLLAR STOCK !!!!!!!!!!!!!!!!!!!!!!!!

  • Report this Comment On July 03, 2011, at 3:48 PM, baldheadeddork wrote:

    Another nice piece, John. Happy Fourth.

    If you got into Ford in the first half of 2009, there is certainly nothing wrong with taking your profits. Especially if the downturn in the market so far this year has made some good companies on your watch list more attractive. If a two or three bagger in two years isn't enough, the biggest risk to your investments isn't coming from Dearborn.

    If you want to stay in F, I think you have to be committed to stay in to the second half of 2012. The economic recovery is slowing and that is going to affect auto sales. The market has a lot of gains priced into F and if/when they fail to hit estimates you should expect the share price to take a hit.

    But if you have a longer horizon, I still think Ford is the strongest company in its sector and I think it's still an attractive value investment.

    Ford will continue to have an edge in new product over its main competitors through the 2014 model year. It has strong growth in the emerging markets, and it's held its own in Europe and South America. In North America, I predict it will continue to gradually improve its marketshare without sacrificing average selling price or ramping up incentives.

    Ford will make its gains mostly on the continuing struggles of Toyota. I'm confident that Toyota's future will be a 11-12% US market share and Ford will be one of the biggest winners from Toyota's fall. Ford's market share could reach 18-18.5% in the second half of 2012.

    Hyundai/Kia is for real, as you said, but they are hitting the wall on their production capacity. In the last couple of weeks they announced extended shifts and mandatory weekends to raise output by 10% - a gain of 30,000 units a year. They're clearly at the point where they have to build more plants to significantly grow their sales and that will take a couple of years at the minimum. If auto sales rebound sharply in 2012, it's easy to see a scenario where Hyundai/Kia will lose market share because they don't have the capacity to keep up with demand.

    And that gets to the best reason to stay in Ford. I don't think we'll really see what the company can do until we get the US market back to 14-15 million units. The price of used cars points to a huge pent up demand for new cars, all we need is a year or so of growing confidence in the economy for it to take off. Ford has a terrific position to take advantage when that comes, but it's not going to happen this year.

    All that said, I'm not buying more Ford now. I'm really worried about the markets taking a major hit if the debt ceiling isn't resolved soon. Right now I'm at about 25% cash and I want to get to close to 50% in the coming weeks to take advantage of a downturn if it happens.

  • Report this Comment On July 05, 2011, at 10:33 AM, TMFMarlowe wrote:

    @SMOKEN42: In January of 2009, I suggested that Fools might want to consider buying Ford. I bought it myself in March of '09 and said so here. I have not suggested selling at any time since (including in this article). I'm not sure how you can argue that that has "cost investors millions of dollars".

    @baldheadeddork: Happy 4th to you as well. Your point about Hyundai's capacity is well taken, and that's something I'll try to look at this week. As for the rest, we're in agreement -- assuming that the market does in fact get back up around 15 million before too long. We shall see.

    Thanks to all for reading.

    John Rosevear

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