What Ford Needs in 2012

Shares of Ford (NYSE: F  ) had a rough ride in 2011. Through Monday, Ford's stock was down about 41% on the year, vastly underperforming the fellow blue chippers that comprise the Dow Jones Industrial Average (INDEX: ^DJI  ) -- which is only up 1.6% since the beginning of January.

What makes that especially frustrating for shareholders is that Ford's managers have, for the most part, executed quite well despite extremely challenging economic conditions around the world. What can the company do to get Wall Street to recognize the value of this strong, successful business in the coming year?

The biggest brake on Ford's success
While there are things that Ford CEO Alan Mulally and his team can be doing to improve shareholder value -- and I'll get to those in a moment -- it's also true that the biggest brake on Ford's value is the economy. Like any cyclical company, Ford's profits, and its stock price, will rise and fall with economic cycles.

"But Ford's solidly profitable," you say, and that's true. Over the last few years, Mulally and company have given Ford's cost structure and global product strategy huge overhauls. As long as Ford's products stay reasonably competitive, and as long as U.S. sales of light vehicles (an industry category that includes cars, SUVs, and pickups) continue at an annualized rate above 10.5 million or so, the new and improved Blue Oval should continue to report a profit every quarter.

10.5 million might sound like a lot, but it's actually the rate of sales that would be expected in the pit of a deep recession. (Even in January 2009, the abyss of the economic crisis, the monthly annualized U.S. light-vehicle sales rate was just under 10 million, which was the lowest monthly level since 1982 -- and it picked up sharply in the months that followed.) In the years before the economic crisis, annual sales numbers regularly broke 16 million. Last year, though, U.S. sales came in at about 11.5 million, and while 2011's total is expected to be somewhat higher (a little over 12.5 million), it's clear that sales remain well below the recent historical trend line.

As that starts to change -- and it will probably change slowly, as the economy improves -- Ford's profits should grow significantly, and trouble spots like Ford's European operation will contribute more to the bottom line. Nothing will help the share price more -- but as I said above, there are other helpful actions Ford's managers can take in the meantime. Fortunately, many of those things are already in motion, and the biggest one is nearly complete.

Enhancing value while waiting for the recovery
No matter where the world's economy goes, 2012 is likely to be a fruitful year for Ford on several fronts. First and foremost, the radical product-line overhaul initiated back in 2006 -- the centerpiece of the "One Ford" turnaround plan -- will be all but complete within a few months, as the all-new Escape (which is sold under the Kuga name in other markets) and Fusion (called the Mondeo elsewhere) make their way to dealers around the world.

For years, Ford has designed and built similar-but-completely-different vehicles for different markets: Until now, the Mondeo and Fusion have been completely different cars that happen to occupy the same market niche in different markets. Likewise for the Kuga and Escape, and until recently, many of Ford's other models. But now, with a single global lineup of products, Ford realizes larger economies of scale. It's also able to invest more in the development of each vehicle, resulting in better cars that compete well with the likes of Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) -- and that can command premium prices.

Both of those factors should help Ford's margins. Ford's operating margin was 6.7% for the first three quarters of 2011, according to Bloomberg. That's not bad as automakers go -- it's ahead of General Motors' (NYSE: GM  ) 5% -- but it's likely to fall below 6% by year-end, CFO Lewis Booth has said, and there's clearly still room for improvement.

More milestones on the way
As shareholder-value-enhancing moves go, few can beat the addition of a sustainable dividend. Ford's will be back in the first quarter, the company announced earlier this month. That should help increase the stock's appeal with institutional investors, boosting the stock price over time.

2012 may also be the year when Ford's long-sought goal of a return to investment-grade credit status becomes a reality. Aside from the (nontrivial) boost of putting an official stamp of success on Ford's turnaround, a credit upgrade will lower Ford's borrowing costs and save the company several hundred million a year in interest payments on its debt.

And speaking of Ford's debt, that burden has fallen from a surreal $34.3 billion at the end of 2009 to a much more manageable $12.7 billion as of Sept. 30 -- about $8 billion less than its cash on hand. As that number falls further in coming quarters, Ford will be able to spend more of its profits on new product development, on further overseas expansion, or even on dividends.

The upshot: The turnaround continues
Unless the U.S. and European economies get significantly worse, 2012 is likely to be a year of continued incremental gains for Ford. As the company realizes the full benefits of the One Ford plan, works on its margins, pays down its remaining debt, and pays its first dividend in over five years, its fundamentals will only grow stronger. If the economy grows stronger as well, next year could be a very happy one for Ford shareholders.

And while Ford's long-awaited dividend will be back in March, you don't have to wait to put the power of reinvested dividends to work in your portfolio. In a special new report, Motley Fool analysts identify "11 Rock-Solid Dividend Stocks," all great additions to a long-term investor's portfolio. This new report is completely free for Fool readers -- click here to get instant access.

Fool contributor John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of General Motors and Ford Motor. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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 (1) | Recommend This Article (23)

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 December 23, 2011, at 9:00 PM, applecreeker wrote:

    I have been a Ford owner since 1967, am the son of a Ford dealer in farm equipment (from the 1930's) as well as vehicles, and will continue to give Ford priority over all other brands due to the durability of the Ford cars, trucks, vans, and SUV's I have owned. From pickups to Pintos, Comet to Caprice, Thunderbirds to Tempos, F100 to E150, Excursion to Explorer, LTD to Lincoln, Taurus to Town Car my family has owned them all. Not one ever had to have a major engine overhaul or even take the heads off or do valves. Only one transmission case was ever cracked, and that was my fault for shifting into reverse while going foreword at about 30 mph. Sure we were replacing starters, generators,alternators, solenoids, fuel pumps, and such but never a major power train component. We changed oil and filters regularly, greased the zerk fittings, and kept the cooling systems flowing. Yes we had the benefit of a lift at the shop and commercial grade service tools, but the Fords survived mud, snow, floods, hills, and even teenage drivers like me or my sons.. For four years our 1984 LTD LX held the record for air hang time crossing the railroad hump near the local high school UNTIL THE SEARS AUTO STORE MANAGER REFUSED TO REPLACE THE HEAVY DUTY SHOCKS FOR ABOUT THE 5TH TIME UNDER WARRENTY.

    Yes I admit I rebelled and tried VW's, Mercedes, Land Rovers, even Nissans and SAABs, I even had an affair with a foreign Ford: Merkur Xr4ti and Scorpio. After warping the heads on a Mitsubishi Van Wagon I went back home to E150's and never strayed again. The only regret I ever had was DRIVING my 1972 Pinto hatchback to the junkyard and being refused entry because there was no demand for Pinto parts; I sold it for $250 in the paper. We abandoned (they shoot horses, don't they?) a 1979 Pinto along the highway in Chicago when my college son tuned it until it ate the valves.

    Please FORD, put a diesel in the small pickups and SUV's: I will camp out on your doorsteps to buy one. And get back to the Navistar (International) diesels that run forever if you treat them right. I would buy a diesel Explorer in a heartbeat if you will put a real frame back under it and keep it rear wheel drive with a transfer case and a real truck chassis. I have been taking care of Fords since I was big enough to hold a polishing cloth and I will never leave Ford unless they walk away from me with ideas like the 2011 Explorer. Ford has a Focus on the future and will be Exploring new markets, Probing the new generations of car buyers, horsing around with Mustangs and GT's, and luxuriating in Lincolns. I will be content to keep turning the odometers over the six figures without major problems.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1747319, ~/Articles/ArticleHandler.aspx, 8/29/2014 12:40:36 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement