What Ford Needs in 2012http://www.fool.com/investing/general/2011/12/22/what-ford-needs-in-2012.aspx John Rosevear
December 22, 2011
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
"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
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