Seven weeks ago, I outlined my plans to create a portfolio of 10 companies that all have one thing in common: They provide a basic need or deliver life's necessities. It's my contention that basic-needs companies can offer investors stability and growth throughout any market environment thanks to consistent demand, incredible pricing power, and delectable dividends. This portfolio, which I have dubbed the Basic Needs Portfolio, will be pitted against the S&P 500 over a period of three years with the expectation of outperformance for all 10 stocks. I'll be rolling out a new selection to this portfolio every week for the next three weeks.
You can review my previous five selections here:
Today, I plan to introduce the seventh of 10 selections to the Basic Needs Portfolio: Ford Motor (NYSE:F)
How it fits with our theme
Of the 10 selections I plan to make, I suspect none will bring more questions than my selection of Ford to a portfolio filled with basic-needs selections. Ford certainly isn't a traditional selection for a must-own stock, given how poorly it performed during the latest recession.
But it's my opinion that Ford is nothing near the company it was even five years ago, thanks to CEO Alan Mulally, and it now possesses all the characteristics that would allow it to weather any domestic downturn.
In 2011 we surpassed the 1 billion car mark in the world, and this figure is only anticipated to rise as emerging-market countries build the infrastructure necessary to grow. As these countries expand from just one or two large centers into rural areas, the importance of automobiles cannot be understated.
In 2006, a Pew Research poll showed that 91% of respondents believed a car to be a "necessity item." Understandably, transit systems, parking availability, and distance to things like a grocery or general store and your place of employment all play a role in determining whether a car is necessary. However, with a figure of 91%, I'd go so far as to call automobiles a growing necessity item.
I've said it six weeks in a row, and I'm going to say it for a seventh: There is no such thing as a risk-free investment. Even Ford has factors that could send its stock lower.
First and foremost, even though Ford has been growing like a weed in the U.S. and China, it needs a stable level of global growth if it's to succeed. Any huge macroeconomic event that can dramatically influence consumer spending (and I'm not talking a minor change in the tax code here) to the downside has the potential to reduce Ford's unit sales and negatively affect its bottom line.
Mulally has worked wonders with Ford's balance sheet and has made sure not to let its current debt burden of $107.6 billion get out of hand. That total might seem egregiously high, but it also includes loans for its finance arm. Outstanding debt for its automotive business is actually much lower. However, debt was the downfall for Ford rival General Motors (NYSE:GM), which required a $49.5 billion bridge loan from the government to sustain its operations while it restructured under bankruptcy. GM has long since paid back its dues to the government in a mixture of cash and stock, but the brand-name damage still lingers on. Ford will need to keep a close eye on its debt levels to make sure it doesn't repeat GM's same mistakes.
Finally, alternative-fuel engines -- namely electric vehicles such as the Model S produced by Tesla Motors (NASDAQ:TSLA) -- could present a growing challenge for Ford's predominantly gas-powered vehicles. Admittedly, the Model S is in a completely different price bracket and is targeting a wholly different consumer than most of Ford's lineup, but it nonetheless represents a growing threat to gasoline-powered engines' existence. Ford will need to stay vigilant with regard to innovation or risk falling behind newcomers like Tesla.
The first thing you'll notice about Ford is that it's absolutely driving over its competition domestically and in China -- the world's largest auto market. In June, Ford saw sales in the U.S. jump by 13% on the heels of a 24% jump in F-Series pickup sales. By comparison, GM saw its sales rise by less than 7%. Ford has stayed ahead of the curve by constantly freshening up the design of its trucks, while GM went clear from 2006 until the 2014 models before it made significant model changes to the Sierra and Silverado.
China has been an even bigger story for Ford, with sales jumping a ridiculous 44% in June from the previous year. Year to date, sales are up an even more impressive 47%, compared with this time last year. In contrast, Japanese automakers such as Toyota (NYSE:TM) and Honda (NYSE:HMC), which gobbled up market share in the U.S. over the past two decades, are now getting a taste of their own medicine in China. Because of country-to-country animosity between citizens in China and Japan, Toyota and Honda have seen year-over-year sales fall in more months than they've risen over the past 10 months.
Another big reason to like Ford is its middle-of-the-road approach to please both power-hungry auto enthusiasts and eco-friendly mpg-seekers with its EcoBoost engines. EcoBoost engines use superchargers than can add power when it's needed but run on a leaner need for gasoline when that power isn't needed, improving gas mileage. This year alone will see as many EcoBoost-fueled vehicles sold as in the past three years combined. This engine could singlehandedly keep Ford well ahead of its competitors, including Tesla, for years to come.
Finally, it's all about Ford's incredible CEO and his growing shareholder incentives. Mulally has completely transformed Ford from the broken company it was in 2006 into the dominant force it is today. He's also responsible for doubling Ford's dividend earlier this year back to its pre-turnaround-era $0.10 quarterly payout. With Ford yielding 2.4% and valued at just 10 times next year's earnings, there appears to be plenty of rubber left on these tires.
Stay tuned next week, when I'll unveil the eighth selection in the Basic Needs Portfolio.