When the global financial crisis swept through corporate America in late 2008, it took along with it some of the largest banks and seriously threatened the automobile industry. Car makers went cap-in-hand to Washington to beg for bailouts to enable them stay afloat. These were certainly not good times for American manufacturers and especially not for those with impressive financial legacies who were suddenly nearing financial disaster as a result of the global economic slowdown. One automaker, however, took a stand which set it apart from the rest and proved the resilience of American economy in times of adversity. Ford Motors (NYSE – F) refused the bailout money and opted to preserve the family name and dignity by weathering the storm alone. Four years later, critics and naysayers alike have been confounded by the remarkable story of the survival and turnaround of Ford, from near extinction to astounding profitability. After losing more than $14billion in 2008, Ford made a profit of more than $7billion in 2011, an impressive turnaround even by American standards.
Many people are now wondering if Ford’s success was a flash in the pan or whether it is a truly sustainable success story. Even more questionable is what the future holds for the stock price of one of the world’s oldest and most famous companies. Despite the negativity that runs through the markets with regards to any manufacturing-related stock, especially in times of economic hardship and declining global consumption, there are several reasons to be bullish on the stock of Ford in the medium and long term.
First, Ford showed that company success, even within the harshest of economic climates, was not a function of how much money exists at the disposal of the board but, rather, in the ability of its internal leadership to think through difficulties and come up with solutions to the problem. In Alan Mullaly, Ford have found a talismanic leader who has been able to reestablish the Ford brand and find pragmatic solutions to declining sales, whilst ditching those ideas or personnel who were clogs in the wheels of recovery and progress. The logic here is simple: those without a vision and belief will not succeed even in the easiest circumstances, but those who dogmatically refuse to roll over and die will likely get up and start running. Ford’s recovery, it should be observed, is in no small part due to the positive contribution of its CEO.
Secondly, Ford has also shown that, in returning to its roots, it has reverted to thinking about the future by factoring in the fundamental demands of consumers into the design of its products. Henry Ford pioneered the manufacturing of many multiples of the same vehicle, known as ‘Fordism’, whilst its competitor Toyota (TM) bent over backwards to design customized vehicles in smaller multiples known as ‘Toyotism’. Both companies are now aware that demand is very much jointly dictated by both factors of individuality and utility. Now that America is getting used to a world of $4/gallon gas prices, the thirsty engines have virtually fallen out of favor. As part of the measures to improve fuel efficiency, Ford has teamed up with Dow Automotive Systems to reduce the weight of its vehicles by as much as 750 pounds through the design and use of low-cost carbon components, improved aerodynamics and the employment of component manufacturing processes. In addition, research is under way to produce vehicles that run on electricity. The end result is to create cars that are greener and cost much less to run and maintain. This has effectively tailored Ford vehicles to the economic demands of its consumers as a result of the economic situation.
Recently, I witnessed a test-run of Ford vehicles with the new safety technology of assisted driving. Sensors can detect when a Ford driver is coming too close to another car. As such, Ford through positive investment in research and development, and has lead to dramatic increase in the sale of owners with assisted driving devices will not have to bother about parking their cars in tight spaces with the fear of hitting another vehicle, or hitting another vehicle in front after sudden deceleration by the other driver. This could not have come at a better time as primary competitors such as Toyota are still reeling from safety issues that caused massive global recalls. This is evidence again, as Ford has always demonstrated, of the company’s ability to tap in to the psyche of its core consumer demands and excel at the elements of design that the mass-market really considers important. How many US parents would currently choose a Ford over a Toyota?
All this combines to boost investor confidence in a stock that is already seeing good times after the dark periods of 2008. With a forward price-earnings ratio of 6.92 (one of the highest in the industry) it has a positive buy recommendation by many and its stock is certainly in demand. The recent demonstration of its earnings recovery is in its figures which show earnings of $20.2 Billion during 2011, it’s largest for 13 years. Furthermore, global demand for vehicles is demonstrably higher, with Japanese manufacturers and Ford competitors such as Honda (HMC) and Toyota showing vast increases in profits. Fords major US rival General Motors (GM) has faired far worse during the economic difficulties but, given its improved position, along with increases in US manufacturing output the demand for motor vehicles can be seen to be returning to the US economy once again. The fact is that Americans need cars and, if Ford can adapt its to modern demands and continue to excel at safety and efficiency, the business looks set to move positively with the next bull market. Evidence that they may be winning the battle for increasingly efficient and cost-effective vehicle solutions is demonstrated with its victory over rival Nissan (NSANY.PK).
Tristan Goldthorpe currently lives in Madrid working for an international private sector development consultancy. He completed a postgraduate degree in London two years ago and has since been studying, trading and writing about politics, economics and the forex markets in his spare time. His particular interests are the use of support and resistance to determine price movements and the tendency for markets to become over-extended. Over the past few years he has researched and experimented with different techniques and strategies and now enjoys analysing and discussing potential trade opportunities and fundamental economics.