Auto companies have historically been terrible investments for long-term investors. Chrysler was on the verge of bankruptcy in the late 1970s and finally succumbed to financial pressure when it filed for Chapter 11 in 2009, the same year General Motors became sarcastically known as Government Motors. Delphi, Visteon, Lamborghini (1978), Daewoo, and others have also gone bankrupt and even such automakers as BMW, Nissan, and Mitsubishi each have their stories about close calls with bankruptcy.
It's against this rough backdrop that I analyze Ford's (F) current standing in the auto market and whether or not investors should see the stock as a value or a value trap.
A savior for the auto industry
The biggest change for Ford over the past decade is the man in charge. Bill Ford Jr. was a great family name but a less-than-impressive executive. Enter Alan Mulally, a Boeing executive with no car experience who took over the company in 2006. By then, Detroit was already well into decline and Mulally faced the daunting task of making Ford's vehicles relevant again.
The next four years would mark many accomplishments for Ford and Mulally, including restructuring retiree health-care costs, negotiating a new contract with the UAW, and surviving the financial crisis without a bailout. The new CEO focused the company on making higher-quality cars that people actually wanted to buy and incorporating technology where it was appropriate.
These changes have left Ford with desirable products from a more flexible business with lower retiree liabilities that were a growing drag on the auto industry for the past few decades.
Ford is a relevant company again
What's been most impressive about Ford under Mulally is the style and innovation that go into its vehicles. During the '80s, '90s, and early 2000s Japanese manufacturers Toyota and Honda took share in the car market by offering more reliable, fuel efficient, and more attractive vehicles. They upended Detroit's hold on U.S. auto sales and, when gas prices rose, they were prepared with the best-selling small cars on the market. Today, Ford is stealing back some of that business.
The new Ford Focus gets 34 mpg, the hybrid version gets 47 mpg, and there's even a plug-in hybrid version. From a styling perspective, Ford is now building arguably the most attractive fleet of vehicles in the industry.
Ford has also brought technology customers can use to their vehicles, adding smartphone apps that make it easier to locate and even unlock your car. Ford is no longer a stodgy company and with new union contracts and a disciplined management team, I'll at least look on the business with a positive light.
Down to the nitty-gritty
From a value standpoint, it's hard to argue with buying Ford stock. It trades at just nine times earnings, pays a 3% dividend yield, and the company is growing. The lumpiness of results is concerning but that reveals some opportunities as well.
The only real bright spot in Ford's latest results is North America. This region produced $8.3 billion in pre-tax automotive profit and the rest of the world contributed negative $2.1 billion. Europe is weak, which isn't surprising considering the economic disaster the continent is going through, and Asia-Pacific isn't contributing significantly to results yet. But that is where Ford has some huge upside.
Last year, unit volume was up 40% and revenue grew 47% in Asia-Pacific and, with just 3.2% of the market in China, there's lots of upside. Operating margin was a meager 1.4%, but if Ford can control costs and gain share, there's a lot of upside.
If North America doesn't go into another recession, Europe recovers at all, and Ford gains just a few points of market share in Asia-Pacific, the company could easily double net income over the next five years.
Foolish bottom line
I'm not crazy about buying into the auto industry, but I think Ford stock is a good enough value to buy right now. Investors may have missed out on the run-up after the recession, but they're buying a less risky investment today. In the auto industry, risk isn't your friend and I think Ford is the least risky stock in the bunch.