COMMENTARY

Ford Motor - From Worst To First? - An Economic View With A Twist

07/31/96
By Gerald Levinson CMA

The best way to describe Ford's situation is that of a major league team in a rebuilding period. Let's look at a little bit of history and the moves being made by management as they look forward to the year 2000.

When you take into consideration years of good profits prior to 1995 you would think Ford was at the top of their game. However after 2 years of almost no profits, loss of worldwide market share along with no change in the stock price in a bull market, you have to ask the question "what's going on?"

Recognizing this slump, Ford's management decided to acquire additional muscle and hitting power by changing their line up that will take them into the next century with Lindsay Wagner acting as the cheer leader.

For Ford, a very conservative cash conscious firm, this was not a simple task. According to Ford, the unfavorable earnings in recent quarters were due to front end costs related to new-model introduction, and production costs that seem to be rising each year.

Showing fiscal responsibility at the displeasure of the shareholders, many of these front end costs were written off as they were incurred in lieu of depreciated write offs. At the same time, Ford has implemented major programs aimed at control of costs and overhead.

With the additional focus on new models, retirement of others and establishing a international "farm" system Ford expects to increase unit volume by 5%. The goal is to reduce costs by $2 to $3 billion by 2000. (Which is management's low ball estimate). This translates from a profit after taxes of 2% in 1995 to 5% a hefty increase $0.50 share after taxes.

Ford expects to accomplish this task by implementing the following profit plans:

1. Leading off, plans are now afoot to make the Escort better than breakeven. The big reason for keeping it in the lineup are the mandatory federal mileage requirements.

2. The introduction of a large utility vehicle named "Expedition" (150,000 units per year expected) which will compete with GM's Tahoe. And there will be a Lincoln version, the "Navigator" for the more affluent fans.

3. In the cleanup position Ford will continue to enhance its truck line with bigger pickup models with extended cabs and 3 door versions (800,000 units per year expected) and will account for almost nearly 60% of unit sales. To cover the entire SUV market a smaller utility vehicle selling below $20,000 will be debuting.

4. Remaining mainstays hoping to improve their performance are the Taurus and Winstar models which did not reach their potential last year.

5. Help will also come from the international group in bringing up a sportier Jaguar model to compete with the BMW 5 series. Along with new models to built in Thailand and Brazil where labor and parts can be less costly. The overall contribution to the bottom line should be positive.

Now if you think that the new line up is great, you should take a good look at the real heavy hitter in the Ford profit team. Ford's Financial Services Group.

This player year after year accounts for over 50% of the bottom line profit and for the last 2 years enjoys a 15% earnings increase. Upon the great success of this group look for a Credit Card division by next June.

As a result of the game plan described above, the stock of Ford has risen to new highs and has been the best performer in the auto group. In fact Ford has outperformed the market by 17% in recent months.

This appears to convey the message that the new team is stronger and should be very successful in the future. Apparently Wall Street believes it.

THINGS TO COME

Later in the fall we will be posting a TACH Automotive Industry Stock Index (AISI) report to be presented bi-weekly at first and then on a weekly basis.

With AISI we will chart the auto industry's past and current performance, along with standard statistical analyses. The stocks to be chosen will include not only the major manufacturers but leading suppliers, service organizations as well as those companies involved in racing and other forms of competition.

We think this should prove extremely interesting and beneficial to those of you investing in the market.

Gerald Levinson -- The Auto Channel