From Cringe-worthy to Lust-worthy: Ford’s Sustainable Profits
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In the 2012 Fortune 500 rankings published this week, Ford (NYSE: F) moved up one spot to number nine overall, based on 2011 revenue of $136.2 billion. More impressively, the company generated $8.6 billion of pretax profits last year. Fortune crowed that in addition to financial success, the company is “pumping out lust-worthy cars again.”
Tired auto magazine jargon aside, it’s true that Ford’s recent performance stands in stark contrast to its cringe-inducing, deathbed experiences of 2008 and 2009. How is Ford managing to grow again, and can it sustain the trend?
The Ford One Plan
The formulation for Ford’s future can be found within the 220 pages of its 2011 annual report. I’m going to save you the trouble of scrolling through one painfully long PDF, and reproduce below the strategic plan of one of the planet’s largest and most sophisticated manufacturing concerns. Ford says that it intends to:
- Aggressively restructure to operate profitably at the current demand and changing model mix;
- Accelerate development of new products our customers want and value;
- Finance our plan and improve our balance sheet; and
- Work together effectively as one team, leveraging our global assets.
That’s it. This clear and purposeful articulation of 21st century automotive strategy is known as the “One Ford Plan.” Like all great strategic documents, it is simple to communicate, specific on measurable goals, but broad enough to accommodate the complex operational plans needed to execute a vision.
Restructuring, But Not Financially
The first priority in Ford’s plan embraces restructuring. Recall that unlike competitors General Motors (NYSE: GM) and Chrysler, Ford was able (if narrowly) to avoid bankruptcy. While the company did undergo a great deal of financial re-engineering after CEO Allan Mulally took over in 2006, restructuring today for Ford means adapting its physical assets for almost any market eventuality. After clinging for years to a monolithic product mix that relied too heavily on margins from SUVs and gas-annihilating F150s, management today places a premium on manufacturing agility.
A prototype plant for this priority is the Camaçari plant in Northern Brazil, widely acknowledged as one of the most advanced automotive plants in the world. This sprawling facility (boasting its own private port) houses Ford suppliers that work alongside Ford line teams and robots to assemble up to five different types of vehicle platforms -- on the same line, at the same time. Flexibility is the governing principle. Flexible manufacturing facilities save money in the long run because they help automotive companies lower their long-term capital investment (versus building plants tied to a single vehicle platform), which in turn keeps long-term debt under control. Bringing suppliers under the plant roof speeds production, cuts costs, and gives plant managers and engineers daily interaction with key personnel in the Ford supply chain. Also noteworthy: to get workers up to speed at this sophisticated factory, Ford invests 900 hours of training per new employee.
Ford’s management team understands that the term “viral” doesn’t apply only to YouTube, and they understand this better than many technology companies. In the aftermath of the Great Recession, economic uncertainty governs consumer behavior. Consumer car purchasing tastes now evolve in months rather than years. Ford sees that the current preference for smaller vehicles may change just as suddenly as the demand for big vehicles vaporized four years ago. So it focuses on streamlining and standardizing global production processes, rather than marrying itself to any single trend. After all, in the next five to 10 years, advances in hybrid and electric-only drivetrain technologies may make SUVs and trucks affordable again, and attractive to green-minded buyers. Either way, Ford will be prepared.
Measuring the Strategy: Profits, and Return On Assets
The sea changes initiated over the last decade, and especially since Mulally took over, have been kind to Ford’s P&L several quarters running:
These profits, and the cash generated from them, allow Ford to execute on point #3: “Finance our plan and improve our balance sheet.” Ford has decreased its long-term debt by 40% since 2007. As you can see from the chart below, reducing the debt load has had a reciprocal effect on Ford’s return on assets: its cash, receivables, inventory, and those flexible manufacturing plants in North America, Europe, and key emerging markets:
Ford will be challenged by an equally competitive GM, which was able to walk away from substantial debt obligations through its bankruptcy.
How Ford Focuses
The clarity of the One Ford plan is reflected in what management has chosen to devote its attention to in the near future, and the potentially distracting paths it’s chosen to forgo. To illustrate, consider the storied and illustrious names (both brands and ownership stakes), that the company has divested itself of recently in order to focus on its core strategy: Mercury, Aston Martin, Jaguar / Land Rover, Mazda and Volvo.
The Near Term
Ford is exposed to the same risks that the other members of the 2012 Fortune 500 class face: it is trying to increase revenues and grow earnings during an economic recovery that has all the firmness and texture of a sponge cake. And yet its management team has developed one of the most lucid and thoughtful strategic plans you will find among major multinational corporations. So far this year, Ford shares are down roughly 4%, and more than 30% off their 52-week high. Expect the rest of this year to be bumpy, as worries about the global economy restrain money flow into quality manufacturers like Ford.
Course of Action
Despite the near-term risk, the company trades at a dirt-cheap PE ratio of 2.9, boasts a balanced path to sustained profits, and finally is starting to sport a fit balance sheet. Strategic execution will support stock price improvements in the coming years. For those financially patient investors who enjoy a calculated risk, 2012 may be the year to build a position in Ford, collecting the new dividend while preparing for future returns.
Finosus has no positions in the stocks mentioned above. 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. If you have questions about this post or the Fool’s blog network, click here for information.