At Motley Fool Stock Advisor, we're about finding stocks with huge long-term upside. Our research efforts double-down on a company's growth potential, competitive advantages, and management quality. It's a strategy that's led to an average return of 60% for our stocks and 14% annualized returns since 2002 versus 1% for the S&P 500.
Let's see why Ford (NYSE: F) currently makes our buy list.
Growth potential
The recent history of the U.S. auto industry probably has you convinced of three things:
- U.S. automakers are hopelessly uncompetitive.
- They can't make quality cars.
- Anyone who invests in them, especially after the recent bankruptcies of General Motors and Chrysler, needs to get their own engine checked.
But we think Ford, the only one of Detroit's Big Three not to go bankrupt, could have investors driving away with profits for years to come.
Let's take a quick snapshot of the major players in the U.S. auto market:
|
Company |
% Change in YTD Sales |
2010 YTD Market Share |
2009 YTD Market Share |
|---|---|---|---|
|
Chrysler |
11.9% |
9.4% |
9.8% |
|
GM |
14.3% |
19.2% |
19.6% |
|
Ford |
28.2% |
17% |
15.5% |
|
Honda (NYSE: HMC) |
11.9% |
10.6% |
11% |
|
Toyota (NYSE: TM) |
9.9% |
15.1% |
16% |
Ford's sales growth in 2010 is leading the pack by a wide margin. More importantly, Ford is the only automaker to gain market share over the past year. Why is Ford leaving its competitors in the dust? As usual, it starts with making cars that people want to buy.
More and more, motorists are steering away from oversized vehicles and opting for those that are smaller and more fuel efficient. Ford recognized this trend well ahead of its U.S. counterparts and began retooling its plants to meet that shift. This meant selling its premium Jaguar and Land Rover brands to Indian automaker Tata Motors (NYSE: TTM) and making fewer of the large pickups and SUVs the company is known for.
One result from that shift was Ford's Fusion Hybrid, which has rapidly become one of the top-selling vehicles in the United States. The Fusion took Car of the Year honors at this year's North American International Auto Show. The positive reaction to Ford's new 2011 Focus -- the centerpiece of Ford's exhibit this year and a cornerstone of its automotive future -- may well signal more prizes in Ford's future.
Competitive advantages
Ford has taken strong steps to address its costs and debt load. It has won major concessions from the United Auto Workers to bring its labor and manufacturing costs more in line with its foreign competitors. A major part of this was establishing the Voluntary Employee Beneficiary Association. A game-changer, the move transferred almost all of Ford's retiree health-care liabilities to a trust now managed and maintained by the UAW. Selling the Jaguar and Land Rover divisions, as well as the Volvo division earlier this year, has helped Ford make serious headway in cleaning up its balance sheet.
Unfortunately, Ford's hourly labor costs of about $55 per hour are still stubbornly higher than those of foreign implants like Honda and Toyota. This puts Ford under a lot of pressure to keep reining in its heavy cost structure while hitting home runs on the product side. Failing on one or both could jeopardize Ford's chances of paying down its massive $27 billion debt load.
On the product side, Ford's brand could be worth more right now than it has in decades. Toyota's gas pedal fiasco and subsequent recalls have tarnished the Japanese automaker's once rock-steady reputation for quality. Meanwhile, GM and Chrysler's bankruptcies may have exonerated most of their immediate financial liabilities, but at a steep cost to their consumer image.
Management quality
I had a chance to interview Ford CFO Lewis Booth at this year's North American International Auto Show. He spoke at length about his company's One Ford initiative, the backbone of CEO Alan Mulally's strategy, which the former Boeing executive has championed since his arrival in 2006. It's about streamlining manufacturing and engineering processes, bringing together previously segregated teams, boosting economies of scale with single basic designs like the Focus, and enabling Ford to produce vehicles profitably in every market.
To Booth, who spent decades running Ford's operations in Europe, Asia, and Africa, One Ford is a "fundamental" change and a significant departure from Ford's prior strategy of catering production to a particular market's unique tastes. "We don't want to be just strong in a few segments, or just in the U.S. or in Western Europe. We want to be strong around the world. This is a different Ford," Booth said. "We are changing the way we do business, completely dedicated to having great Ford products in all segments around the world."
To get our latest thinking on Ford and access to our current buy, sell, hold recommendations on all 90 companies on the Stock Advisor scorecard, take a free trial of Stock Advisor. In the meantime, let us know what you think of Ford in the comment section below. Does it make your buy list?
