Ford's Strengths Make It a Geat Bargain

Bobby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I own Ford, (NYSE: F) and the recent drop of 9%, due to expectations of a weak 2013 in Europe, suggests an opportunity to buy more. Sure, Europe will continue to bleed money -- Ford expects to lose $2 billion in Europe this year, but in my opinion this is already reflected in the price. At $49 billion, Ford 's market cap is a low 37% of sales as compared to Toyota Motor's (NYSE: TM) 77%, and even lower than Tata Motor's 46%!

Here is a SWOT analysis summarizing why Ford remains my favorite among auto makers.

Strengths

  • Huge brand recognition and competitive advantage as the only American auto maker that was not bailed out by the taxpayer.
  • Strong American pride for the same reason assures solid demand from those wanting an American brand.
  • Repositioned itself as a high quality brand after two decades of recalls, accidents and poor quality.
  • In six short years, CEO Alan Mulally transformed Ford from a beleaguered fiefdom run by bean counters with no vision and lousy quality standards, into a world class “car” company, by focusing on great products and quality standards.
  • Strong Brand Loyalty:  An Experian report for Q3/2012 shows Ford topping Toyota 44.1 to 43.3 for brand loyalty, and Ford Fusion owners as the most brand loyal, with more than five out of ten returning to Ford.
  • Competes well in most segments that it is in -- Dominates pickups, strong number 2 with Fusion in the mid size, and competes well with Focus in the economy segment.
  • Fusion’s huge 65% YoY growth in January 2013 suggests that the Fusion could become a Camry-like cash cow for Ford.  Most automakers would love to be in Toyota’s position with Camry contributing about 33% of Toyota’s sales, and being its largest profit center. Ford has been in that position with the Taurus earlier, and could well return to that sweet spot with the Fusion.
  • Leadership in control and well planned for the next decade:  With the brilliant Mulally stepping down for longtime Ford executive and Chief Operating Officer Mark Field, Ford will remain in great hands.

Weaknesses

  • Operating margin to remain flat at 10% next year.
  • Late entrant in China; a lot of ground to cover, which will use up at least $5 billion of capital.
  • Cost of funds higher than bailed out competitors -- Ford has a debt to equity ratio of 5.3 compared to 0.4 for General Motors.
  • Europe (about 22 % of worldwide sales) will continue to remain weak for at least two to three years and drain cash.

Opportunities

  • Ride the trend towards migration to bigger and more profitable vehicles due to the housing recovery.
  • Builders' confidence will lead greater demand for pickup trucks, which don’t last as long as passenger cars.
  • Maintain leadership position in the fuel economy segment -- As Daniel Miller‘s article pointed out, Ford’s Ecoboost engine has been extremely successful. KPMG ‘s survey cited 92% of respondents choosing fuel efficiency as their number one factor. This is a trend that is going to dominate the next generation of cars and drivers.
  • Ride on its coat tails of being a fuel efficient brand to grow in the fast growing green segment:  Ford, though lagging way behind Toyota, which dominates this segment at 76.2% of the U.S. market in Q3, 2012,  is still the second best.  And with the fast growing C Max hybrid, Ford could emerge as the other strong player.
  • Use its experience to manage Europe’s recession:  Among auto makers in Europe, Ford is perhaps best positioned to deal with, and emerge stronger from, Europe’s lack of growth.
  • Pent-up demand:  The average age of the U.S. automobile has gone up to 10.8 years, ahead of 9.4 in 2007 and 5.1 in 1969. Sure, building better cars has a fair amount to do with Americans keeping their cars longer, but 10.8 years is a historic high and a catalyst for growth.

Threats

  • Continued government support towards European car makers will make Ford's efforts to reduce costs moot.  If the U.S. bailout seemed unpalatable to most Americans; bailouts, better known as government support in Europe, are a way of life there. What Ford could take years to achieve may be granted by the stroke of a pen to a weaker but more socially relevant competitor.
  • Asian competitors will take back market share.  Japanese car sales in North America rebounded around 27% in 2012, after the Tsunami and supply constraints allowed Ford to take away market share. Barring any other unforeseen events, Toyota and Honda will regain lost ground.
  • Hugely competitive cyclical industry -- Price wars in the guise of cheap financing and incentives especially from competitors who are not doing as well, undermine Ford. I don’t expect this threat to disappear any time in the near future.

Investment Recommendation

As we've seen in the past several decades for auto companies; its not just about economic cycles, cost cutting and labor relations  --  its about building great products (The Chrysler minivan, Taurus, Camry) recognizing trends (going green like the Prius) fulfilling customer needs (easy navigation, voice recognition), maintaining quality control (Even Toyota was humbled in 2010 in its haste to gain market share) and maintaining its brands.

Ford was the one company that recognized this best, way back in 2006. More importantly, it has walked the talk and executed well -- I believe this is just phase two of its resurgence.

Ford's strengths clearly dominate its weaknesses, and among its peers it is the best equipped to satisfy changing customer needs and deal with a slowing global economy.


poach has a position in Ford. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. 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!

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