Ford Analysis: Buy or Sell?
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since Jan. 1, 2011, Ford (NYSE: F) stock price has tumbled nearly 40%, abruptly reversing its price increase after the recession. Questions circle the company like vultures, regarding the beloved CEO Alan Mulally’s successor, Europe woes, and high levels of debt. Does Ford's tumble in price provide us with an attractive entry point? Or are we merely trying to catch a falling knife?
A SWOT analysis offers a simple yet effective breakdown of businesses. It allows us to look at multiple angles of any business and decide what outlook it has as an investment going forward. It involves the following:
Strengths, Weaknesses, Opportunities, and Threats
- Increased Margins – The recession forced many dealers to dish out large incentives to create sales revenue. Since then, limited incentives combined with selling premium add-ons has helped margins recover, more than doubling each year since 2008.
- Operating Efficiency - Ford will build 85% of vehicle volume off nine core platforms. That is great news for operations, and it will provide a lean, flexible yet standardized production process.
- Brand - Ford has a very powerful brand image. The value of the "Blue Oval" logo was put up as leverage to receive $25 billion in loans prior to the 2008 recession. The brand image continues to improve as its Detroit competitors took government bailouts, and as Ford's vehicle quality improves.
- Balance Sheet – Ford has a weak, albeit improving, balance sheet. Its percentage of long-term debt to capitalization has been reduced drastically, although it still remains a high 43%.
- Union Negotiations – When a company is consistently producing profits, everyone wants their share of the pie. Ford will have to come to the negotiating table with union contracts again in September 2015, and if Ford continues to progress at this rate, expect the union to be more aggressive for a larger share of the profits. Consider Hostess as a recent worst-case scenario.
- China – Ford was late to the game in China, and it's making a concerted effort, through new vehicle offerings, to catch up with its’ dominate rival General Motors (NYSE: GM). In October, Ford reported an increase in vehicle sales to 60,518, a 48% improvement. GM couldn’t match Ford’s lofty improvement, but still added to its’ position with a 14% gain to 251,812 vehicles sold. Part of this success is at Japanese automakers’ expense. A recent territorial dispute between Beijing and Tokyo is causing a fierce backlash against Japanese businesses. Honda posted China October sales down 54%, while Nissan also posted a plunge of 41%. Look for U.S automakers, along with German and Korean, to take advantage of this over the next two to three quarters.
- Investment Grade – Ford has made improvements on its balance sheet, including a significant pay down in long term debt. It’s slowly but surely clawing its way back to investment grade. I don’t believe it’s a matter of if it receives the upgrade, but when. When this happens, I believe it will be a catalyst for demand of its stock causing the price to pop.
- Global Weakness - From Ford's 8-K: “Our combined results for the second quarter for Ford South America, Ford Europe, and Ford Asia Pacific Africa could be a loss of about three times as much as the $190 million pre-tax loss incurred by these operations in the first quarter.”
- Toyota Motors (NYSE: TM) – Toyota boasts a larger number of hybrids sold than any other major auto company, at 14% of total vehicles. For 2012, Toyota announced that its hybrid units surpassed 1 million sold. It isn’t stopping there, with plans to roll out over 20 new models by 2015. Green is trending, and Toyota promises to be a tough all around competitor.
- Honda (NYSE: HMC) – Honda is a quality international company, diversified through cars and motorcycles. Its 3.7% profit margins look slim compared to its competitors'. While Honda has its hands full with a recent recall of 11,500 motorbikes because of brake-system problems, it expects rebounding sales, up to 25% in North America, to help it remain a stable competitor.
The age of vehicles on the road in the U.S is at an all-time high, averaging 11 years. With gas prices remaining stubbornly high, Ford's focus (no pun intended) on fuel efficiency will pay off as consumers empty their wallet with each trip to the gas station. This year, the Ford Focus will compete for the best-selling car model in the world, and the Fusion is grabbing 12% market share in the fastest-growing segment, midsize sedans.
There’s a lot of ground to make up internationally, but Ford is making the right decisions to put itself in a profitable position with immense growth potential. I believe management will continue making good decisions from top to bottom, including the very important one it faces in naming Mulally's successor.
Bottom line, Ford is making a better product than it did a decade ago. Its marketing campaigns are working, as evident through its increasing sales. Ford has created company synergy, leading to increased operating margins. It innovates, has a solid vision, and sports the industry's best CEO. The fundamentals have improved as well, with a reinstated dividend, drastically reduced debt, and increasing cash flows.
When I look at the SWOT and Ford as a whole, I see an astonishing turnaround story. I see a company with a bright future worthy of investment. What do you see? Let me know in the comments below.
dmiller5350 owns shares of Ford. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. You can follow Daniel on Twitter @StreetSmartFool. 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!