Throwing In The Towel On Ford

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September 21, 2006 | Stocks | | Author Asif

Being an investor in Ford Motor (F) or General Motors (GM) over the last two years has probably been a ride as wild as Six Flags (SIX) New Jersey’s famous Kingda Ka roller coaster. Towards the end of 2005, I picked up Ford for my personal portfolio and also decided to feature it in the January 2006 edition of my investment newsletter, which was based on the Dogs of The Dow theory.

I picked Ford as a contrarian bet given the extreme negative sentiment surrounding the company and because I felt that there was a lot to like about the company at that point. Sales of the redesigned Mustang were very strong, the coveted GT supercar was launched to great acclaim, sales of the midsize Fusion were encouraging and Ford had a stable (pun intended) of premium brands like Aston Martin, Jaguar, Land Rover and Volvo. Apart from sitting on a sizeable cash position of $17 billion, Ford also had stakes in Mazda and car rental company Hertz. Ford’s international operations were growing in Europe, India and China and their finance arm was profitable. The expectation was that Ford would eventually return to profitability through its “way forward” restructuring program and I did not mind collecting a 5.1% dividend while I waited for Ford to achieve said profitability.

But a lot has changed since then. Ford has continued to lose market share, pushed out the profitability target beyond 2008 and completely eliminated its dividend. Ford has also hired ex-Boeing executive Alan Mulally as CEO and while some may view this as a positive step, I am not sure an outsider to the automotive industry was the required fix. Much to the dismay of car enthusiasts, Ford also decided to stop production of the $150,000 Ford GT after just two model years.

All this talk about a possible merger with Nissan (NSANY) and General Motors (GM) also does not make any sense. GM faces many of the same problems faced by Ford such as high healthcare costs, rising retirement obligations and a product lineup that is still highly dependent on large SUVs. It is beyond me how Carlos Ghosn, the current CEO of Nissan Motor and Renault, can also effectively manage Ford.

Based on these recent developments, I have finally thrown in the towel with Ford and will shortly sell my long position. If an investor wants to invest in the automotive sector, international stocks like Tata Motors (TTM) or the commercial division of Volvo (VOLV) offer much better opportunities.

For additional reading, check out the healthy discussion sparked by my earlier articles about Ford here and here.

Voluntary Disclosure: I am currently long shares of Ford, but not for very long.




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Comments

  1. Glenn Hassan
    September 22nd, 2006

    I think you’ll be selling it too soon. Alan Mullaly, being an outsider, will bring a fresh perspective to the ailing detroit industry. Another industry insider will only bring the "same old, same old" strategy. Stay long and give this guy a time.

  2. Asif
    September 22nd, 2006

    Glenn, most people on the street share your point of view. Usually outsiders are good for a company as they are likely to think "outside the box" and come up with creative solutions. There is a good chance that he might turn the company around.

    However, since he came on board, he announced further buyouts, pushed the profitability target to 2009 (or beyond) and has decided to suspend the dividend. No innovative ideas there.

    Without a dividend, income investors are not likely to be attracted to Ford. There is obviously no question of growth investors wanting the stock either. As for value investors, it is clear that Ford is not going to be profitable for 2 to 3 years. So I basically see Ford as dead money at this point unless they start making some innovative changes.

    They were late to the hybrid phenomenon (but to their credit they did build the hybrid Escape much sooner than competitors like GM and Chrysler), but could avoid the same mistake again and get a leg up by buying this innovative Silicon Valley based electic car company called Tesla Motors.

    The sale of Aston Martin should more than pay for this purchase.

  3. Glenn Hassan
    September 22nd, 2006

    Hi Asif,

    Thanks for the response. I think the fact that Ford suspended the dividend is a good thing. This will give them some breathing room to invest in more exciting vehicles. It’s true that the dividend income investors will pull their money, but the growth and turnaround investors will replace them. I saw an article saying Alan is actually having lunch at the employees cafeteria and starts driving Ford cars (give him insight on why their cars are bad). I also think that they have few winners in their lineup, such as the mercury brand and the mustang. (the problem is they need to get it consistent across the board and Alan is probably the best man to do that). Again I think you need to give this guy some time. I think he might still be in the “airplane” timeline, which take longer to build.

  4. Glenn Hassan
    July 30th, 2007

    Asif,

    Thanks for the email. I’m still bullish on it but felt that it’ll take longer for Alan to turn this around, so I sold my position a while ago. I felt that there are other companies with better potential for the short term. Now that they came up with a profit, I might have to look into it again. From my first pass, on the earning release, it seems that they started to get quality under control, hence reducing the warranty costs down. This is a really good news and I think it’s inline with Alan’s strength in manufacturing.

    My sources also shows that they’re gaining favorable reviews internationally, more so than Toyota.

  5. Asif
    July 31st, 2007

    Thanks for your feedback Glenn. My first thought was that they posted a profit because of the sale of Aston Martin but it looks like even after taking that sale out, they were able to book a profit.

    I will check on the international sales and if they are indeed gaining traction the stock would be worth a second look.

  6. hyennah
    August 2nd, 2007

    Happy Bday SINLETTER…Congrats Asif , your sinletter  portfolio is 2 years old now. I consider myself a novice investor and your site has been  very informative and educational for me.

  7. Asif
    August 2nd, 2007

    Thanks, I appreciate your kind words. It has been a very interesting journey and I am glad you find the site and the newsletters useful.

  8. Ameet
    August 13th, 2007

    Hello, Asif.

    Just days before I stumbled across your SINletter website, I had moved all my IRA monies from Money Mkt Accts to some decently diversified mutual funds right at the peak of DJIA 14000 — having kicked myself for missing the 600+ point rally in stocks in the previous 60 days (as my IRA custodian does not allow frequent trades). I am spending some slepless nights and riding the roller coaster for now, as the last 4 weeks have been brutal for most investors.

    Unfortunately, I cannot (once again) move the funds until Sept 15 (for another 60 days) without penalty from the MFs. After that, however, I plan to follow your model portfolio very gradually and cautiously. I am also planning on reading your recommended books — which will require an herculean effort on my part (I am not a heavy reader — and finance is not my area at all).

    Anyway, I just wanted to thank and inform you that you are doing a tremendous service to your readers (just received my first newsletter this month). I am very impressed with your work ethic, work product, and the handsome returns you have generated for your subscribers.

    I have bookmarked your site and make it a point to visit it daily after market closes — to compare the change in your portfolio. That reminds me — could you add on the top right hand side (just below the indices) the daily % change in your total portfolio?

    Once again, many thanks for dedicating countless hours of time sharing your knowledgebase and pointing complete strangers (too) in a financially lucrative direction. I do realize that you are spending all that time away from your family or other hobbies you have. To be honest, sometimes I can’t help wonder why you are doing this service — or if there is a catch just around the corner! I hope my skepticism is a myth, however.

    Make it a good week.

  9. Asif
    August 13th, 2007

    Gradually and cautiously is probably the best way to follow someone else’s portfolio as it provides no more than a source of ideas that you should explore and research further on your own.

    As far as reading goes, I usually tell people who are just starting out to read Smartmoney Investing 101 and then One Up On Wall Street to get some insights from Peter Lynch, one of the best money managers of the 80s. If you are already familiar with the basics "Common Stocks and Uncommon Profits" as well as the book that is considered the investing bible Security Analysis (not an easy read) are great choices.

    Market volatility has been quite high over the last few weeks but it does not even begin to compare with the volatility of the Indian market, which at one point last year corrected as much as 10% in a single day. Imagine the Dow dropping 1,300 points tomorrow. I am almost done with a small blog entry about market conditions and should post it shortly.

    Daily or even weekly portfolio fluctuations do not mean much but I will look into what it would take for us to start tracking daily portfolio returns and add it to the model portfolio like you suggest.

    There are a few reasons I am writing this investment newsletter and blog. Writing down an idea makes me take a cold hard look at the facts and it has helped me discard many unsuitable investments that may have looked appealing at first glance. I may also at some point launch a paid newsletter or start a fund and building a base before heading in that direction sounded like a good idea to me. For right now I am happy with my career in Information Technology and work with some truly outstanding colleagues.

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