Ford: Restructured for Growth

09/13/2013 8:00 am EST


Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

After suffering through one of the most trying periods in its history, US automakers have emerged financially stronger and stand to benefit from a number of tailwinds in the domestic market, observes Elliott Gue, editor of Capitalist Times.

At the end of 2012, the median age of passenger vehicles still on the road in the US touched a record high of 11.4 years; the rising age of the US auto fleet implies that many of these cars will need to be replaced in coming years.

Credit availability and affordability have also improved dramatically, which should continue to fuel sales of new cars. Although interest rates have ticked up slightly this year, the cost of financing the purchase of a new vehicle remains near a record-low.

The only major US automaker to avoid bankruptcy during the Great Recession, Ford Motor Company (F) boasts the best-positioned product lineup to take advantage of improving automobile sales in the US, and long-term demand growth in China, and other emerging markets.

Although playing hardball with the union has enabled Ford Motor Company to lower its cost structure, our bullish investment thesis reflects a number of other company-specific developments.

For one, the restructuring plan, designed and implemented under CEO Alan Mulally, has simplified the firm's operations dramatically, by reducing excess manufacturing capacity and paring its extensive portfolio of brands.

This so-called One Ford initiative involved the US$2.3 billion sale of Jaguar and Land Rover and the US$1.6 bullion divestment of Volvo. After selling the majority of its stake in Mazda, and discontinuing Mercury, Ford Motor Company's portfolio consists of its eponymous mass-market brand and the higher-end Lincoln.

Under Mulally's leadership, Ford has rationalized the number of production platforms to five core platforms that account for 80% of the firm's models. Management plans to transition the company to nine shared platforms that represent about 99% of the carmaker's automobiles.

This strategic move should improve the auto company's economies of scale, by enabling the firm to negotiate quantity discounts on parts, and minimizing costly factory retooling.

Equally important, Ford Motor Company will be able to adjust production to meet changes in consumer taste and demand.

The use of common platforms has also allowed the carmaker to accelerate the introduction of new models. Over the next three years, Ford Motor Company will update each of its major models, keeping the average age of the car designs in its showroom at about 2.3 years—well under the industry average of about 2.7 years.

As newer designs usually sell better and command higher prices than legacy models, the carmaker's commitment to maintaining a fresh product lineup should also bolster the firm's profit margins.

And Ford Motor Company's new lines of fuel-efficient cars, especially the Fiesta and Fusion, have proved popular with consumers.

Outside the US, the carmaker has a number of initiatives under way to grow its sales in China, where the company plans to double its product lineup by year-end, and continue to remodel and refresh its showrooms. Management expects its dealer network in China to expand to more than 900 locations by 2015, from 600 by the end of 2013.

Ford Motor Company has also put its financial house in order, using the free cash flow generated by its increasingly popular lineup of cars and light trucks, to reduce debt and return capital to shareholders.

This company's strong balance sheet and improving growth prospects prompted the firm to double its dividend in the first quarter to $0.10 per share, equivalent to an indicated yield of 2.4% at the stock's current quote.

With a price-to-sales ratio of 0.45, Ford has one of the lowest multiples in the S&P 500; several factors suggest that the company should command a higher valuation in coming years.

First and foremost, the complete transformation of the US auto industry should find favor among investors. The unfunded liabilities, inefficient manufacturing practices, excessive debt, and bloated cost structures no longer plague the Big Three.

From 1997 to 2000, US automobile sales stood at similar level to today. At the time, shares of Ford traded at roughly 11 times to 12 times earnings; at a valuation of 12 times next year's estimated earnings, Ford would be worth $21 per share—30% higher than the prevailing stock price.

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