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  1. Analysis
April 28, 2010

ANALYSIS: Ford right to sound note of caution

On the face of it, all should be sunshine and smiles on the top floor of Ford's Dearborn, Michigan, headquarters, not a cloud in sight. Ford has just released stellar looking quarterly financial results and is increasingly confident that it will chalk up a significant profit for 2010 as a whole.

On the face of it, all should be sunshine and smiles on the top floor of Ford’s Dearborn, Michigan, headquarters, not a cloud in sight. Ford has just released stellar looking quarterly financial results and is increasingly confident that it will chalk up a significant profit for 2010 as a whole.

Moreover, the company is performing well in its major markets around the world, Ford’s latest models hitting the spot with consumers – whether it be the Figo In India, Fiesta in Europe or the Fusion in North America.

And Ford CEO Alan Mulally can rightly take a lot of credit for leading Ford through a period of unprecedented industrial turmoil, fresh impetus and focus provided by the ‘One Ford’ core strategy. While Detroit rivals floundered and took US government bailouts, Ford stayed above the fray, helped by the mortgaging of assets before the financial crisis hit.

Ford’s rising share price has reflected widespread positive sentiment towards the Blue Oval. The company’s turnaround has been – and still is – a seductive story of corporate revival. And, even more amazingly for some, it’s a corporate revival for a company that engineers and makes things and is based in Michigan.

In short, Ford has been standing out from the automotive pack as a success story for some time now.

CEO Mulally is not getting too carried away though. Sentiment will, sooner or later, change and managing expectations is an essential part of the game where investors are concerned. Vehicle demand remains subdued and recovery in many automotive markets has a very long way to go before pre-2009 levels of demand are reached again. Improving rates of cash generation for anybody are by no means a foregone conclusion.  

Has Ford hit a high-water mark in terms of its revival? In some ways, yes, at least in terms of relativities – and some of that is outside of Ford’s hands.

Ford has looked like a company well ahead of the game at a time when its cross-town rival GM appeared to be broken – possibly beyond repair. But the favourable tail-wind provided by industrial circumstances and Ford not taking the government nickel will be easing off.

‘New GM’, free of debt, is starting to get its act together again; there’s a resurgent Chevrolet and the Volt isn’t too far away. An IPO late this year or early next  will attract investor capital that might otherwise have been attracted to Ford. The perception that Ford is the only credible act in Motown will be changing, Ford coming off its industry-in-crisis sole US automotive port of call high.

If Ford has enjoyed solid market share gains in the US, partly borne of the perception that it has been better managed than others and possesses improved products (many of which hit the market at just the right time), it could nevertheless be that the biggest gains have now been made. Toyota the brand is still damaged but may soon be over the worst. The idea that GM is irredeemably broken will be on the wane with the passage of time and an IPO.

There are some headwinds for Ford ahead. Cost pressures will be there on new product development and rising commodity prices. Ford’s balance-sheet looks weak. The flip-side of taking out the mortgages that kept Ford out of Chapter 11 is that it has a lot of debt – $25bn – and that will eventually have to be repaid. The Fiesta has been a massive hit in key markets around the world, but it might be hard to maintain new product hits as successfully as Ford has been doing lately. And margins on small and compact cars where Ford is doing well tend not to be high (and Volvo’s departure – whatever the merits of that – removes a global premium brand that might have been a moneyspinner in five years’ time). Ford is also investing heavily around the world in new capacity and that investment does not come cheap.

All the while, automotive markets are staying tough. The European market, in particular, will be a hard place this year as scrappage incentives disappear.

The US light vehicle market this year is likely to turn out at a less than exciting 11m-12m units, Toyota (ironically, perhaps) setting the pace on incentives. Next year won’t be barnstorming, either. We are certainly not seeing a V-shaped demand rebound for the industry after the deepest economic recession in living memory.

For all that, turnaround specialist Alan Mulally has done a very good job with Ford so far and the latest financial results underline the achievement. The challenge ahead is to maintain progress for Ford in a less favourable environment.

As Ford CFO Lewis Booth said yesterday, a $2bn quarterly net earnings figure should not be seen as a running rate. After masterminding an astonishing turnaround for Ford and successfully navigating the worst of the industrial crisis, Alan Mulally now has to manage expectations – and they may be unreasonably high – in the next phase of the auto industry’s uneven and gradual recovery.

There is still a very big job to do in maintaining progress for Ford, building on undoubted achievements and further consolidating ‘One Ford’, but it likely will not be as spectacular as what we have recently witnessed. After a very good run for the Ford share price (a twelve-fold increase since late 2008), there has already been some profit-taking. Ford’s share price fell yesterday, despite its bumper earnings announcement, partly reflecting a less bullish outlook for the company.

If you have been wowing the markets with a constant flow of generally good news and positive surprises, that’s clearly a good thing. However, keeping it going is not easy. Turning spectacular progress from a low base in unprecedented industry circumstances into the next phase of less spectacular but nevertheless healthy corporate growth that lays further foundations for long-term success would be no mean feat, given the state the industry is in.

The next 2-3 years for Ford are probably what Alan Mulally’s time as Ford CEO and the whole ‘One Ford’ strategy will ultimately be judged on, rather than the initial – if impressive – turnaround in Detroit. It is, in many ways, still early days.

Dave Leggett

US: Ford swings to bumper Q1 profit

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