With the Dow Jones average hitting all-time highs, curious investors wonder how much upside potential there might be in Ford Motor Company common stock.
Roller Coaster
The company’s stock sank to an all time low of $1.49 on January 31, 2009. At the closing bell last Friday, the Dow hit 14,397 and Ford stock closed at $12.98/share.
Is Ford back?
Yes, but Ford isn’t the same company it was in April, 1999, when Ford stock was $40.00.00/share. Ford was a much larger company – in terms of revenue, number of employees, and manufacturing capacity.
At the time, Ford owned Hertz Rental Car Company. Under former CEO Jack Nasser, Ford embarked on an ambitious buying binge, acquiring upscale European nameplates like Aston Martin, Range Rover, Volvo, Jaguar and a controlling interest in Mazda.
In 2000, Ford spun off its parts manufacturing operations when it created Visteon. At the time of the spinoff, Visteon had 70,000 (former Ford) employees and some 200 locations worldwide. Ford stockholders of record received Visteon shares.
Forgettable period
The years 2000 through 2008 is a period Ford employees would just as soon forget. Ford racked up approximately $30 billion in red ink which included a decision in 2006 to borrow $23 billion to help finance the company’s restructuring under the leadership of turnaround CEO Allan Mulally.
In 2008 the company lost $13 billion - the biggest annual loss in the company's 105 year history.
Nasser refuted
By the time Ford's restructuring was fully implemented, Ford would shed some 40,000 employees and close 14 plants. Ford divested ownership of Volvo, Range Rover, Aston Martin and Jaguar, reduced its stake in Mazda, sold Hertz, closed dozens of dealerships and eliminated the Mercury brand. The restructuring is seen by insiders as a refutation of former CEO Jac Nasser.
Good news/bad news
The good news: Ford was able to avoid bankruptcy without having to take government loan guarantees. This allowed the Ford family to retain control of the company.
The bad news: After all the cutting, Ford lacked the manufacturing capacity needed to capitalize on its freshened model lineup.
Even if models like the redesigned Focus, Fusion or Taurus were to become super popular, sources inside Ford’s marketing operation say - off the record - that Ford would not have the manufacturing capacity to meet demand.
That’s what happens when a company gets rid of 40,000 workers and closes 14 plants.
Manufacturing capacity
Until Ford adds manufacturing capacity, the company will not be able to sell a car model in volumes like they did in 1964 when some 400,000 Mustangs were sold, or when the original “jellybean” Taurus was at its peak. In 2000, Taurus sales topped 380,000. Compare those numbers to the current-generation Taurus, which sells about 65,000 units per year. Current-generation Mustang sales are about 80,000 units.
Invest for tomorrow
During Ford’s fourth quarter 2012 Earnings call with financial analysts, Ford CEO Allan Mulally stated the company "will invest for tomorrow by increasing capacity in North America by 400,000 units.” How soon this added capacity can actually put iron in showrooms remains to be seen.
Fourth quarter review
During the same earnings call, Alan Mulally, President and CEO and Bob Shanks, Chief Financial Officer outlined the high and low points of Ford’s fourth quarter. Total company operating profit was strong but automotive operating profit and margin is about equal to last year.
As for automotive results, North America has been delivering the best operating profit and margins since 2000. South America was profitable for the ninth consecutive year, and Asia Pacific and Africa achieved record full year wholesale volume and revenue. Ford Credit is providing strong results. Automotive related cash flow was positive for the third year in a row. Europe, however, incurred a substantial loss. (To be fair, GMs European operation isn’t doing any better.)
Losses in Europe look to be the last pothole on Ford’s road to recovery. Unless and until Ford gets Europe straightened out, Ford stock is likely to pace the Dow as it rises and falls and stay within the $11.00 - $14.00 range.
Full disclosure: The author owns Ford stock.
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