Maybe it is because I grew up in Georgia, but Ford Motor Co. (F, Financial) is one of those household names like Coca-Cola (KO, Financial). The company has about 14.8% market share in the U.S. and nearly 8% in Europe. Sales in North America and Europe made up nearly 65% and 20% of 2016 auto revenue respectively. While the company has steadily increased earnings since the 2008-09 recession, the stock has dipped below the rest of the S&P 500 due to the 20% year-over-year drop in market value.
Ford replaced its CEO on Monday, who promises a fit, fun organization. Coming from Steelcase Inc. (SCS, Financial), it is easy to wonder whether James Hackett will get the job done. He was the youngest CEO in that company's history at 39, with success credited to a move toward technology despite being in the furniture business. He is now 62 and the auto market is clearly shifting into a new age with technology more at the forefront - autonomous electric vehicles.
In his first press conference after the appointment, Hackett said, “Any time this Rubik’s cube is being turned around, we have just as much advantage in that future as anyone else. We have a right to it. And what we have, that won’t be lost, is this great vehicle business. The number one vehicle in the world is built by Ford Motor Company, and that’s not lost on me. The license you get to make change is from your care where all the earnings are coming from.”
One thing is for sure, Hackett is a Michigan man. He played football for the Wolverines back in the 1970s and, along with his wife, has donated substantial sums to the university as well as outfitting the Ford School’s building with Steelcase furniture.
The city of Detroit will continue to improve after coming out of bankruptcy, helping the company in the long run. Clearly, I like beaten-up opportunities. If you like the automotive industry, Ford is definitely the best trade right now. Despite the sporadic earnings and a massive need to upgrade its branding, the company remains profitable, has decent margins, a great product line and pays a 5.5% quarterly dividend.
If Hackett and the company can make the successful pivot and get on or ahead of the trends with new innovations, Ford, an 114-year-old company, will look downright cheap at this price.
There are two big risks for the auto market as a whole. One, the debt pile is continuing to grow. According to Morgan Stanley, about 30% of subprime car loans are bundled into bonds considered “deep subprime,” a level that has risen since 2010 and is resulting in much higher delinquency rates. Two, the demand for buying a car is diminishing due to the sharing economy. Uber, Lyft and other ride-sharing services are making it much easier to not have a car.
Only time will tell whether the company can grow earnings or if it will just be a dividend play, but I think it is worth the risk.
Disclosure: I do not own shares of Ford.
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