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Ford's plan makes its stock a buy
The plant closings and 30,000 lost jobs will be painful. But at least Ford understands what is required to turn the company around.
By Robert Walberg
Ford Motor isn't the first U.S. automaker to announce a painful restructuring of its operations. But its radical plan -- in sharp contrast to General Motors' recent job-slashing announcement -- is the first to acknowledge and address the real problems plaguing the U.S. car companies.
Ford (F, news, msgs) announced a massive overhaul this morning that includes cutting 25,000 to 30,000 jobs and closing 14 plants -- with eight of those plants shuttered by 2008 and the rest by 2012. The reduction in headcount represents about 25% of its North American employee base, compared to cuts totaling about 17% over at GM. Ford will decrease annual production capacity by 1.2 million vehicles, or about 26%.
Here's what I like about Ford's announcement: The management team seems to understand that current conditions demand that the company cut its costs, but that cost cuts alone will not solve the companys problems. Unlike GM (GM, news, msgs), Ford realizes that too many of its vehicles arent appealing to customers and that its image needs a makeover as well.
Forward focus
Fords plan, dubbed The Way Forward, calls for remodeling many of its midsized sedans that have steadily lost share over the years as well as retooling its strong truck brands to build on its strength in that segment. The company recognizes that it must end the steady erosion in its market share and that the costs of its vehicles arent the only problem. Management is even considering getting out of certain segments -- minivans, for one -- altogether.
Contrast that to the attitude at GM, where management continues to focus on reducing operating costs and lowering prices to improve earnings and sales, while doing nothing to streamline its bloated product mix or improve on its dated, unappealing styling.
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Where Ford is similar to GM is in the fact that its domestic auto business right now is a mess. Last year, sales of SUVs and minivans declined between 10% and 53%. Car sales werent much better as bland designs and a perception of inferior quality resulted in further erosion of market share.
Profits from overseas
Despite the struggles domestically, Ford managed to post much-better-than-expected earnings for the fourth quarter thanks to improving results overseas. The company earned 26 cents a share from continuing operations on sales of $47.56 billion. While Ford lost $143 million in North America, its worldwide automotive sector reported a loss of only $12 million for the quarter versus a year-ago loss of $470 million. Ford Motor Credit reported net income during the quarter of $737 million, down about 12.2% from the same period last year.
For all of fiscal 2005, Ford earned $2 billion, or $1.04 a share. Global sales for the auto sector for the full year jumped to $154.5 billion from $147.1 billion. Gains in Europe, Asia and South America helped offset declines in the US market.
A dearth of new designs
Unfortunately, the outlook for fiscal 2006 isnt very promising. Even though todays restructuring announcement will certainly help Ford keep a lid on its costs, the fact remains that the company has only a handful of new car designs for the year. In other words, the company has to try to stem the bleeding (domestically) with virtually the same product mix that resulted in this years dismal numbers. Thats unlikely to happen.
But while Ford will probably experience additional share declines in 2006, at least you get the sense from management that they will be working on new designs and new technologies that will bring about better results down the road. Mark Fields, the relatively new head of North American operations, is a no-nonsense leader serious about bringing a new culture to Ford. The success he enjoyed in turning around Mazda a few years ago and, more recently, Ford Europe, suggests that Ford is not going to play it safe and trot out more of the same boring designs in 2007.
Though this might just seem like another massive restructuring from a U.S. automaker, it rings different to me in that Ford actually seems to get it. The company understands that it will no longer be one of three players in the U.S. market, but one of six or seven, as management admitted in a recent Wall Street Journal article.
The turnaround wont come overnight and the stock might spend another three to six months going nowhere. Nevertheless, with management committed to cutting costs and reloading for the future, now is a good time for patient, growth-oriented investors to add a little Ford to their portfolios. The downside risk from these levels seems relatively limited, whereas if the company is successful in repositioning its brand, there is a strong chance for a double within the next 18 to 24 months.
Ill add Ford to my Street Patrol portfolio after todays close.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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