I often get looks of surprise when I comment on Ford Motor Co.* as an attractive investment, so I thought it might be worthwhile to explain my view. I’ll lay out the most common issues many would-be investors have with Ford and then address each.
Popular perception: Low profitability
Ford’s auto business does generate fairly low profit margins, but in North America margins are in line with the best in the industry. Europe has been losing money, but this is being addressed by the restructuring plan announced late last year. Latin America and Asia have had low profit margins recently but things should improve when a barrage of new global products hit those markets.
The key point, though, is that Ford is unique among automakers because it has actually been generating very high returns on equity (i.e. in excess of 25%) for some time now (Source: Factset). They are creating value for shareholders.
Popular perception: Pension obligations will create earnings volatility
Ford indeed has a large pension obligation, but they have a plan to neutralize this exposure. The company has increased its pension contributions to reduce the liability, but it’s also changing the makeup of its pension asset portfolio to better match assets with liabilities.
Management expects that this de-risking strategy will ultimately be rewarded with a higher market valuation – and I agree.
Popular perception: Ford products are low quality
Anyone looking at the current Ford product lineup would have to concede that it is globally competitive and a marked improvement over prior Detroit offerings. Sales have been strong despite criticisms by Consumer Reports over quality and reliability. In the interest of keeping this blog entry short, I will summarize my views on the key criticisms:
My Ford Touch navigation screen and one particular auto transmission
- The bulk of the criticisms have been in these two areas
- Most of the problems have been or will be rectified
- Both issues, I believe, relate to Ford being a first mover in bringing these technologies to the masses
Mileage claims for electric vehicles (EV) and turbocharged engines
- This issue not unique to Ford. I do believe real-world, observed mileage will be lower than EPA listing for most drivers – particularly drivers of EV, hybrid or small engine turbos
- Ultimately, consumers will be attracted to the products for their style and driving characteristics and these other issues will be resolved
What could destroy my thesis around quality is product recalls. The current number is simply too high and needs to decline before the company can achieve its goal of becoming a “premium” mass producer. This concern has been voiced and I expect it will be addressed.
Our outlook for Ford
The “One Ford” core global platform strategy is a key competitive strength. Essentially, it enables rapid refresh of products, the manufacture of multiple vehicles on the same assembly line (flexibility to quickly respond to segment trends) and purchasing economies of scale. Eighty-seven percent of 2013 global volume will be on core platforms and substantial supply chain cost benefits are likely to follow. Revenue opportunities are likely on the horizon as well with the new focus on top common products, globally, for each segment.
While Ford currently lacks a strong premium brand, I was encouraged by the Lincoln MKC concept vehicle that I saw at the Detroit Auto Show and think there may be hope for Lincoln becoming a near- luxury brand similar to Acura.
Ford may be weak with respect to luxury offerings, but what it does have are trucks. Ford’s F150 is a big contributor to overall profitability, and I expect pickup truck demand to mirror the recovery in U.S. housing starts.
We have a position in Ford in the funds I co-manage. We believe, based on the current share price, that further investment upside is possible, as Ford rationalizes its European operation and begins to reap the benefits of its global product strategy.
For a quick look at my insights from the Detroit Auto Show, please read “Is the auto sector revving up?“.
What are your thoughts on Ford? I’d like to hear from you.
*The above company was selected for illustrative purposes only and is not intended to convey specific investment advice.