Looking for a stock that will perform when the recovery hits? Take a look at Ford ($3.25 closing price on April 3, 2009). It may seem surprising given the turmoil of the U.S. auto industry, but consider the following to start:
• It is now clear that Ford’s financial condition is materially different from U.S. competitors GM and Chrysler, who are on the verge of bankruptcy. Ford did a much better job in financial contingency planning, raising cash before the financial crisis, so it does not (yet) need U.S. Government aid to survive.
• Despite the well-deserved rap U.S. automakers have had for building poorly designed cars with bad service records, Ford has made real strides in quality, reducing costs associated with warranty service by $1.2 billion in the past two years.1
• And although the relevance of fuel efficiency in the current environment given lower gas prices remains unclear, Ford has been expanding its fleet of hybrid and other fuel efficient vehicles, positioning itself for when oil prices inevitably rise again.
What’s the counter argument? Arguably, the most immediate risk at this point is that the deterioration of the other U.S. competitors will cripple the parts suppliers, causing a ripple effect on Ford through the breakdown of the supply chain. But government policy-makers have had months to understand this risk and will likely work to mitigate it. While bailing out big companies who made bad decisions is a hard sell, supporting a business environment to save the only U.S. automaker ahead of the curve in addressing past mistakes and preparing for a rainy day is a story politicians can work with.
Significantly, Ford has also shown sensitivity to building a corporate team with ties to both sides of the political aisle. Former Democratic House Majority Leader Richard Gephardt was appointed to the Board of Directors last month, while David Leitch, who served in the George W. Bush White House as Deputy Counsel to the President, continues to serve as General Counsel. While the appointment of Alan Mulally—who had worked at Boeing since college—as CEO was originally met with skepticism, his background as an industry outsider is likely to continue to be an advantage with Washington.
What this leaves is the very basic and compelling argument that when the competition fails, the strong get stronger. One reported survey by CNW Marketing Research indicates that in January and February of this year, 19% of people who planned to buy a GM car changed their minds to a Ford branded vehicle, while 15% of Chrysler buyers did the same.2
The above notwithstanding, the risks remain significant, including a longer and/or deeper than expected recession, and higher than expected dilution of equity in raising new capital. There’s also the prospect that short-term setbacks may provide more optimal buying opportunities, so gradual accunulation may be a good strategy here. All that being said, an abundance of ingredients for success are present at Ford: smart financial decisions, weakening competitors, improving quality, and political savvy.
(Note: The author holds a secuties positions that is long on Ford as of the original publication date of this post.)
- “Ford’s Warranty Repairs Costs Decline Further in 2008 as Quality Continues to Improve,” http://www.ford.com/about-ford/news-announcements/press-releases/press-releases-detail/pr-fords-warranty-repairs-costs-29800; Chris Shunk, “Ford global warranty costs slashed by $1.2B over last two years,” Autoblog, Feburary 3, 2009, http://www.autoblog.com/2009/02/03/ford-global-warranty-costs-slashed-by-1-2b-over-last-two-years/. [↩]
- Matthew Dolan, “Rivals’ Revamps Vex Ford,” The Wall Street Journal, April 1, 2009, at B1. [↩]