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The Ford Motor Company was incorporated in 1903 by Henry Ford, who transformed personal transportation with his Model T, an automobile that was reliable, efficient and reasonably priced. To meet the growing demand for the Model T, he designed the first moving assembly process to produce cars on a large scale. This assembly method was a great success and was widely adopted throughout the industrial world.? Soon after, Henry Ford came out with another revolutionary idea: paying workers $5 a day, doubling the current rate and effectively creating an American middle class to which he could sell his cars.
Ford soon dominated the manufacture and sale of cars in the U.S. and Canada. It became and remained the second-largest car manufacturer behind General Motors for 56 years, until Toyota toppled Ford to the?third position in 2007. However, Ford, GM and Chrysler, Detroit’s “Big Three,”? became unwieldy, uncompetitive and laden with legacy costs from the UAW. In 2006 the average wage and benefits for an hourly worker at Ford was $70.50, of which $41.63 is the cost of benefits. That was 32 % more than Toyota’s overall average cost of $48.
The UAW is not the sole reason for the Big Three’s financial downfall. They became victims of their own success, which drove revenues into the billions. Even in the aftermath of the 2008 financial crisis, amid dramatically weaker global demand, Ford delivered total revenue of $118 billion for 2009, understandably 33% lower than its 2005 revenue of $177 billion.
The Big Three failed because they were so successful and so intricately linked to the employment structure of the U.S. economy, that they did not pay attention to their competitive moats. They were caught unawares by the arrival of Toyota and Honda which delivered better quality vehicles that were desired by the American consumer. In short, the Big Three’s brand images had been deteriorating for years.
Fortunately for Ford Motors, Chairman William Clay Ford Jr. had the foresight to bring in Alan Mulally as president and CEO in September 2006. Mulally began his career with Boeing as an engineer in 1969. In 1998 be became president of Boeing Commercial Airplanes and assumed the CEO duties of that unit in 2001. A proven leader, he believes in delegating responsibility with authority, and accountability. He has an intense focus for getting the job done.
Mulally and his team developed the ONE FORD plan and implemented it in 2006. Essentially it is a plan based on global teamwork, and leveraging the global resources of Ford. More importantly, it focuses on cutting out the fat through aggressive restructuring, creating and delivering best of the breed products that consumers want, and strengthening the balance sheet. Since 2006, the? focus of the ONE FORD plan had delivered some impressive results.
During the height of the financial and economic crisis, Ford?was the only U.S. auto company that did not use the government bridge loans provided by TARP. In fact, the severity of the crisis caused its competitors, General Motors and Chrysler to file for bankruptcies. Ford, on the other hand, had fortuitously raised $34 billion in the capital markets in 2006 as it prepared to fund itself through a massive restructuring program over the next three years and to provide a cushion for any recession or unforeseen event.
Ford delivered on?its goals. By 2009, it had reduced $10 billion in structural costs and returned to profitability. Ford turned from a massive loss of $12.6 billion or $6.72 per share in 2006 to making a profit of $2.7 billion in 2009, or $0.86 per share. It appears that the One Ford plan is working as it continued to generate $6.4 billion profit for the first nine months of 2010. Its operating cash flow improved from minus $5.6 billion in 2006 to $9.2 billion in 2009 and $3.4 billion in the first nine months of 2010.? It is on target to be net zero debt by the end of 2010.
How did Ford do it? While GM and Chrysler were mired in bankruptcy and Toyota haunted by its own widespread car recalls, Ford was gaining market share. The unintended consequence of it not needing TARP funds was a major positive publicity and branding event. It gathered new respect and trust. Together with the improvements in quality and focus of consumer needs and desires which started in 2006, Ford gained market share two years in a row since 1993!
According to JD Powers and Associate, consumers with higher disposable income are now excited by the Ford brand and are willing to pay the higher price associated with?its vehicles. Ford Fusion Hybrid was just named the North America’s Car of the Year 2010, as well as being Motor Trend’s Car of the Year 2010. The Transit Connect is named the North America’s Vehicle of the Year. The Ford Fiesta has led Ford to be the #2 brand in Europe, while investments in China, India, and Brazil position Ford’s growth in the emerging markets. Ford has invested $450 million in its Michigan assembly plant to manufacture electric battery packs for its electric cars, hybrids and hybrid plug in. Ford is investing in and for the future.
In addition to creating cars that consumers want, Ford has implemented aggressive restructuring of personnel, manufacturing and engineering costs, and effected the full transfer of the legacy retiree’s health care liabilities to VEBA, the trust fund for retiree health care benefits. The significance of this transfer is that Ford’s liability to retiree’s health care benefits is now irrevocably capped. ?Ford will repay the remaining balance of $3.6 billion to VEBA in this fourth quarter ahead of schedule. ?This brings the total debt repayment for 2010 to $10.8 billion which ?saves $800 million in annual interest expense.
Given this compelling turnaround, is Ford a good buy at current price near $16? The answer is a cautious “yes” because of several reasons.
Ford has earned $1.61 for the nine months ended September 30 2010, and the analysts’ earnings estimates are for $2.00- $2.10 for the full year of 2010 and 2011 respectively. If one applies a conservative price to earnings ratio of 10, then the target price is $20.00. Also, there is a good probability that the earnings in the next several quarters will be better than expected because of the stimulus from the Federal Reserve’s announced quantitative easing of $75 billion per month to a maximum total of $600 billion by June 2011.
Ford stock has already increased 62% year to date and 15% in just the last week alone due to the good third quarter result. There is a downside risk to $14.50. The prudent strategy is to apply only 50% of the target allocation at around $16.00 and enter the balance if the stock trades back to $14.50.
There is a strong technical resistance at $18.00, which means that the stock may be range bound between $14-$18 until a catalyst such as a great fourth quarter result propels it higher. One must get value even if this is a remake of an American Icon!
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