Strong Hands on the Wheel
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Some industries are more risky than others, and the auto business is clearly a very tough one. But this doesn't mean that investors should necessarily avoid the sector, on the contrary, opportunities sometimes abound where others fear to tread. Shares of Ford (NYSE: F) are offering some exciting upside potential, and a rock solid management team which should be able to mitigate economic risks and capitalize on opportunities for growth.
On Risk and Return
Worried about the fiscal cliff, the mess that is Europe or some other issue? We all have reasons for concern regarding the stock market and the economy, not one but several at the same time. But trying to predict the future is a generally worthless venture, it just can't be done with precision on a consistent basis.
Some investors choose to protect themselves by investing in low risk companies, those with less sensibility to the business cycle or other kinds of problems. There is nothing wrong with that if it fits your risk profile, but these kinds of mature companies in low risk sectors also provide less upside potential in the long term, at least on a general basis.
On the other hand, if you are more willing to assume some risks, there is more potential for profit. The key of course is to choose the right risks to assume, and Ford looks like a convenient alternative from that perspective.
A Great Driver
Allan Mulally became CEO of Ford (NYSE: F) in 2006, and he recently announced he is remaining in place until at least 2014. This is certainly good news for investors in Ford, Mulally started streamlining the company's operations and balance sheet before the 2008/2009 recession, and he was able to ride through that storm without any government help.
Both Ford and GM (NYSE: GM) have seem remarkable recoveries from the financial crisis, but Ford is in better financial shape, and the company has been implementing some smart initiatives under Mulally´s leadership. The company reduced its operating and financial costs in a material way and, perhaps more importantly, its renewed focus on quality has been much welcome among consumers.
The company is planning to produce an increasingly higher proportion of its vehicles on common platforms over the next years, an initiative which will reduce development costs and improve economies of scale. This is the kind of idea which makes a company more competitive in the tremendously harsh automotive industry, where competitiveness can be a matter of life and death.
Ford announced the resumption of its dividends last year, which shows that management feels comfortable regarding the company's financial strength, even in a challenging economic environment. The company is devoting its cash flows to better funding its pension plan over the next years, and once that is done, there will be more free resources available to increase those dividends or implement a share buyback program.
Full Speed Ahead
Ford has regained a lot of prestige and market share versus Japanese competitors like Honda (NYSE: HMC) and Toyota (NYSE: TM) over the last years, but the Japanese are recovering their production levels after the devastating earthquake and tsunami which seriously affected their operations last year. Honda and Toyota are increasing their efforts in light trucks, a business in which Ford generates most of its profitability.
But Ford is in a much better competitive position now, and it's still dominant in light trucks. At the same time, the company is planning to invest heavily in China over the next years, the company has already committed nearly $5 billion in the country, and this represents an exciting opportunity for growth. China is arguably the most vibrant car market in the world, yet ford is way behind General Motors and Japanese companies in that country.
Although from a smaller customer base, Ford has been outgrowing GM in China over the last months. Honda and Toyota are facing serious problems in the country, as the political conflicts between China and Japan have produced a strong negative sentiment towards Japanese automakers from Chinese consumers. The Asian giant is presenting a fantastic opportunity for Ford to expand its operations in a high growth market.
The company is also reviving its Lincoln luxury brand to compete in the same segment as the successful Lexus brand from Toyota. This will require some serious money, and it's a risky bet, but the company has proven to investors that it can improve the quality of its products, and the management team deserves the benefit of the doubt.
The Road to Profits
Not only has Ford made an impressive comeback, the company has some interesting opportunities for growth over the next years. The auto industry is cyclical and very competitive, but Ford is led by the right management team, so this is a risk worth taking.
acardenal owns shares of Ford. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!