The automaker's stock remains depressed after a run of gloomy news. BW's Gene Marcial thinks it's a compelling opportunity for long-term investors
It isn't raining but pouring bad news at Ford Motor (F). The automaker's stock, which sold as high as 67 a share some 10 years ago, tumbled to a new low of 4.95 on Mar. 17, 2008. It has since inched up to 6.75 as of May 30, but that's still an awfully low price. At that price—less than the cost of two gallons of gasoline—Ford stock is a fire-sale bargain.
Don't take it from me. Listen to a person who knows the auto industry well: activist and veteran investor Kirk Kerkorian, who intends to buy more Ford shares to add to his current 4.62% stake in the company—at a higher price. And bear in mind, if the stock continues to wallow at this depressed level, expect at least one more activist investor to jump in, according to some Street sources.
One hedge fund manager, who declined to be named, makes this observation: "Ford is a natural target for the activist fund managers—it has a huge brand name known worldwide, in an industry that has been smacked down but whose prospects would be enormous once the U.S. economy recovers from its current malaise." This pro also points to new products in Ford's pipeline that should lift the company toward a recovery when they hit the market, and to "serious and determined" efforts by management to turn the ailing company around. The manager predicts that one or two other activist players are eyeballing the situation very closely and could pounce on the stock at any time.
Kerkorian to the Rescue
On Apr. 28 the second largest U.S. automaker surprised Wall Street by reporting a profit of $100 million for the first quarter of 2008, its first since the second quarter of 2007. The Street was expecting a loss, and the shock of a U.S. automaker posting a decent profit pushed up the stock to 8.21, from 7.50 the previous trading day. Heavier-than-anticipated cost-cutting, plus strong sales in South America and Europe that helped offset the weak performance in the U.S., enabled Ford to deliver the unexpected profits.
A month later, however, the upbeat mood in Dearborn, Mich., changed. Besieged by a drop in sales of trucks and SUVs caused by high fuel prices and the poor U.S. economy, the company conceded that it wouldn't be able to meet its goal of profitability in 2009 and at best would only manage to break even. It made new production cuts and proceeded to lay off more employees. Analysts quickly downgraded their ratings on the stock and cut their sales and earnings estimates. Predictably, the stock fell, and by May 30, it had dropped to 6.71.
That was when Kerkorian jumped in with an announcement that he would still honor his commitment to increase his stake, as planned, to buy 20 million more Ford shares at $8.50, a price he had agreed to when he had offered to buy more shares on May 8. He waived a condition in his tender offer that would have allowed him not to proceed with the purchase if the stock dropped 10% or more below the May 8 closing price of 8.20. Kerkorian, through his investment firm Tracinda said that he continues to believe in Ford's management and in its ability to turn the company around.
Beautiful Table Setting
Kerkorian has a colorful history of engagement with the auto industry. In the 1990s, he acquired a big stake in Chrysler, whose management he pressured to enhance shareholder value. His unrelenting efforts pushed Chrysler into a merger deal with Daimer-Benz (DAI). In 2005, his efforts to achieve the same goal at General Motors (GM) didn't quite succeed. He sought to effect a change in management and tried to push it toward restructuring the No. 1 automaker. Kerkorian gave up ultimately, but not before he had scored a decent profit on his 10% stake in GM.
And then he turned his attention and interest in Ford. On Apr. 28, 2008, he made a surprise disclosure that he had bought a 4.7% stake. But in this case, Kerkorian did not apply any pressure on management because he had confidence in Ford CEO Alan Mulally as an effective turnaround executive. Kerkorian admired Mulally's previous job at Boeing (BA), where he took charge of a major restructuring at the aerospace giant and succeeded. In the autumn of 2006, William Clay Ford Jr. stepped down as Ford's CEO and recruited Mulally to succeed him, with the principal task of saving Ford and retuning it to long-term health.
At its current price, Ford's stock is "an absolute steal, considering Ford's assets, growth prospects when the economy turns around, and the aggressive turnaround efforts of management being pursued by CEO Alan Mulally," says Georges Yared, founder and chief investment officer of Yared Investment Research. Mulally is "setting the table beautifully for an effective rebound, and that's the obvious reason why Kerkorian is determined to increase his stake in Ford," he adds. Yared believes that by yearend 2009 the turnaround efforts will bear fruit. "The stock could easily double by then," he predicts.
Likely Rewards for the Patient
Independent research firm ValuEngine on May 20 issued a buy recommendation on Ford, based on information it gathered and its own calculations. "We feel that Ford has the probability to outperform average market performance for the next year and exhibits attractive company size, price/sales ratio, and market valuation," said ValuEngine in a report. One of Ford's latest plans is to introduce the new Ford Fiesta small car in North America by early 2010, plus a sporty European hatchback model. The vehicles are being produced at a $3 billion plant in Mexico, where it will make pickup trucks for the Mexican market and small cars for North America. Ford expects the market is headed toward more small cars and intends to devote a lot of its increased production capacity to such vehicles. The Fiesta will be the first family of small cars that Ford will introduce, in Europe and Asia in 2008 and in the U.S. in 2010.
To be sure, there isn't much enthusiasm in the analyst community. Michael Ward of Soleil Securities is the only one among 14 major analysts who rates Ford a buy. His 12-month price target is $10.
Standard & Poor's Efraim Levy, who rates Ford a hold, expects Ford to post a 2008 loss, on top of a deficit of $1.40 per share in 2007. He says CEO Mulally has enhanced Ford's improvement efforts.
Certainly any more adverse news about the economy and oil and gasoline prices could drive down Ford's stock. But conversely, any good news about the economy and a boost in auto and truck sales—plus reduced fuel costs—could also power an awesome runup in Ford's stock. Steer clear of Ford if you are looking for easy, short-term gains. But for patient long-term investors, Ford's stock price is compelling.
Note: Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.