America’s Great Turnaround Story
It wasn’t just bad, it was a bloodbath.
The just-ended year not only gave us the back half of one of the worst economic downturns in the past century, it also marked the long-anticipated end to a storied chapter in American history as General Motors and Chrysler went bankrupt, and the U.S. government was forced to bail out the auto industry.
Between the economy, lackluster consumer confidence, tight credit and everything else that could and did go wrong, it was a lousy year to be selling vehicles. Edmunds.com, a leading online automotive research service, expects car and light truck sales of 10.4 million for 2009. Even despite the popular “cash-for-clunkers” program, that would be the lowest sales pace since 1970, harkening back to a time when the nation had 70 million fewer people.
Not only was 2009 a tough year, but it capped off an abysmal decade. In 1999, the Big Three (when was the last time you heard that term?) — GM, Ford (NYSE: F) and Chrysler — moved 68.3% of the vehicles sold in the United States. By 2009, their market share had fallen to 43.9%.
From this wreckage, however, emerges a relatively unscathed Ford Motor Co. The Blue Oval is not just surviving but thriving. After a record loss of almost $15 billion in 2008, Ford is turning things around. The carmaker posted a profit of $1 billion or $0.29 per share in the third quarter, shattering analyst’s expectations of $0.12.
Even better: Ford made a profit in North America for the first time since 2005. Analysts are predicting the company will post a net profit in 2010, earnings that should increase in the next several years. Ford, for its part, had expected to just break even by 2011.
Ford shares showed remarkable resilience in 2009, gaining more than +560% from their $1.50 low in February to their year-end close near $10, a phenomenal recovery.
How is Ford doing it?
In 2006, the company announced a major restructuring plan designed to return Ford to profitability by 2011. The company shuttered unprofitable plants and sold non-core businesses such as Jaguar and Land Rover. It hired Alan Mulally, the former Boeing Company (NYSE: BA) honcho, as chief executive. And the company then mortgaged all its assets to raise more than $23 billion to finance the development of more competitive vehicles.
The influx of capital gave Ford the liquidity to endure the financial crisis and, at the same time, enabled it to develop what is considered one of the most promising pipelines of new cars in the industry. The entire Ford, Mercury and Lincoln lineup will be almost completely upgraded by the end of 2010. Its new models are already selling well. And the company recently earned quality rankings that surpassed competitors Toyota (NYSE: TM) and Honda (NYSE: HMC).
Ford, which launched the SUV boom with its popular Explorer, has now begun to concentrate its efforts on building smaller, more fuel-efficient cars. The lineup for 2010 is +20% more fuel efficient than the year before and includes well-received cars like the redesigned Ford Focus and the Fusion and Mercury Milan as well as four hybrid cars. A new Taurus and Fiesta are in the offing.
Ford has grown its market share by building high-quality vehicles people want to drive. Its strong financial position meant it didn’t have to take a government bailout, which earned it some goodwill with the American public. Ford picked up +2.2% in U.S. market share in the third quarter from the year-ago period, and has captured nearly 15% of the U.S. market. Merrill Lynch expects Ford’s U.S. market share to rise another +3% during the next four years, ultimately exceeding GM. Ford is making similar headway in Europe and South America, and it increased sales in China by +63% between the third quarter of 2008 and the third quarter of 2009.
Ford still faces challenges. The United Auto Workers, which represents Ford employees, rejected a deal that contained a “no strike” clause and other provisions that would make the company more competitive. A huge pile of debt looms: $26.9 billion as of the end of the third quarter.
Ford’s restructuring aims to reduce the company’s debt in the next several years, by some estimates as much as $10 billion. In the third quarter, Ford and Ford Motor Credit had combined operating income of $2.5 billion with interest expenses of $1.6 billion. (A respectable coverage ratio of 1.56.) And Ford had almost $24 billion in cash at the end of the third quarter.
Although Ford has proven resilient, it will likely need at least a decent economy to remain profitable. That may be in the works. As world economies continue to recover, the prognosis for auto sales in 2010 has improved. According to the latest industry forecast from the Canadian global economics research firm Scotia Economics, better access to credit and a return to +3% growth in the global economy will buoy auto sales in 2010 and set the stage for record volumes in 2011. According to the firm, China will lead demand followed by India, Brazil and the United States.
Cost savings and product improvements have made Ford leaner and meaner and in better shape relative to its rivals than it has been in a long time. While shares have handily recovered from their 2009 low, the stock is still a long way from the highs of nearly $40 achieved in the late 1990s. The timing could be right for these shares, with a recovery coming and Ford hitting on all eight cylinders.
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