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The Basics of Ford

John Rosevear
September 17, 2012


Worldwide Invest Better Day 9/25/2012

For the past two decades, The Motley Fool has been working hard to help you invest better. This September, we're reaching out to millions of investors to help guide them in their quest toward financial knowledge and independence.

In that spirit, I'd like to introduce you to the basics of a company that many people know but fewer people know well: Iconic American automaker Ford (NYSE: F  ) .

The revival of an American icon
We all know what Ford does. Ford's cars and trucks have been ubiquitous on American roads -- and roads around the world -- for more than a century. Founded in 1903 by Henry Ford, the Ford Motor Company pioneered the mass production of affordable vehicles and arguably did more than any other single company to usher in the age of motorized transportation.

That's one heck of a resume, isn't it? Ford's long history is full of superlatives, but what's most relevant to today's investors is the company's recent history -- and the remarkable turnaround it has made under its current CEO, Alan Mulally. Like its Detroit counterparts, General Motors (NYSE: GM  ) and Chrysler, Ford was in deep trouble by the middle of last decade, too dependent on truck sales that were fading as gas prices rose. But unlike GM and Chrysler, Ford's leaders saw the disaster coming in time to finance its own turnaround.

In 2006, Mulally and his team essentially mortgaged everything Ford had, including the famous Blue Oval trademark, to secure more than $20 billion in loans in a last-ditch attempt to turn around the struggling company. Long story short, it worked even better than they'd hoped: Some painful restructuring was needed, and things looked ugly during the worst of the financial crisis, but since then, Ford's new products -- and profits -- have shined.

The secret of Ford's current success
Those new products have paid off big for Ford, in more ways than one. While the public's perception of Ford's quality hasn't quite caught up to the reputations of Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) , the truth is that Ford's quality has made huge strides -- and increasingly, longtime import-brand loyalists are giving Ford's new cars and trucks a closer look, and they're liking what they see.

Meanwhile, Ford's restructuring, and Mulally's decision to reorient Ford around a smaller, globalized lineup of products, have done great things for the company's bottom line. On a pre-tax basis, Ford has been profitable for 12 consecutive quarters -- with big profits in North America the "engine" of the company's global finances.

Those profits have come despite a level of sales that is still far below pre-recession levels. Two key factors are responsible. First, Mulally's restructuring and operating plan, called "One Ford," lowered the company's fixed costs -- its ongoing investments in everything from factories to engineers -- dramatically. That in turn lowered Ford's "breakeven point": Ford now says it will be profitable as long as industrywide U.S. auto sales remain above 10.5 million a year, a rate of sales likely to be seen only in a deep recession.

The second factor is the