Is it time to sell the turnaround story of the decade?
The stock of iconic automaker Ford
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
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
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
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.