Shares of Ford
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
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'
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.
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