Tuesday, January 19, 2010

Ford : Rests - 1:0 : One of the brightest pick of 2009 according to WSJ

Neither I nor my group members were auto analysts. But we were bold enough to choose an auto company when we did a project on management decision in last spring as part of managerial economics. The company was saved from a macro economic disaster due to some crucial decisions of the management. . We picked Ford and concluded that management took some dramatic decisions in past years that were paying them off during the greatest depression (2007-2010) since the great depression. Last week we exchanged emails among the group members who were part of the project and were of the opinion that we should have invested on Ford last year. Ford’s share was $1.5 in February, 2009, this week they are above $10 first time since August 2005. Last week James Stewart in Wall Street Journal picked Ford and Amazon as the bright picks for 2009.

Let me share some of our findings that we believed to have contributed towards Ford’s dramatically different position than its domestic counterparts.

Capital Raising
In 2006, Allen Mulally, Ford’s newly appointed CEO had been in office for less than 90 days and surprised the industry by seeking a $23.6 billion loan by mortgaging the company’s assets. Mr. Mulally stated that the money would give Ford “a cushion to protect for a recession or other unexpected event”
At a time when the economy looked recession proof and credit was available at very low interest rates, this sounded very strange to many. However, in part by this loan purchased three years ago, Ford was in better shape than its domestic competitors. The loans have kept Ford independent and floating during the severe credit problem during early 2008.

Asset Monetizing
In 2005, corporate bond rating agencies downgraded the bonds of both Ford and GM to junk status. One of the main reasons behind that was a heavy dependence on declining SUV sales for revenue. In light of this, Ford management decided to sell all its non-core brands. In June 2008, Ford sold Jaguar and Land Rover operations to Tata Motors for $2.3 billion. Both of these brands had been losing money for quite some time. In November 2008, Ford sold most of its shares in Mazda for about $440 million. Ford also intends to sell Volvo, which could raise another $2 billion. By selling their non core brands, Ford has not only obtained liquidity, but has also designed a pathway which concentrates more on their core brands.

Operational Efficiency
On the other hand, unlike their competitors, Ford has managed to avoid separating their car companies from their finance company. The owners are tied through family relationships and this has helped them utilize their resources efficiently. The resources are optimized by the owners to help sale curs or help setting floor level plans for the car dealers.

All these management decisions are dramatically different from GM and Chrysler. Our team believed that as a result of these decisions Ford was the only US auto maker not to take any Federal bail out money and was well positioned to thrive in this situation. Ford is proving us right and may beat Toyota as the second largest selling car in USA. Definitely Ford is way above their domestic counterparts.

I am proud of our findings. I would like to share it with other group members Arendt Kevin, Shane Alex and Joshua Suess. Unfortunately, while we were theoretically correct, we were not practical. We should have invested on Ford.

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