Ford - leading US auto?

I have been bullish on Ford since GM and Chrysler got bailed out by the government. From a pure company fundamentals perspective I stand correct, however from a share price perspective it’s a mixed bag and that’s the topic for this article. The company has produced outstanding sales numbers compared to previous years. It has two highly anticipated cars coming to North America in the next year the European Fiesta and Focus. When one compares the existing North American Focus and the UK version there is no comparison; having driven both all I can say is that the UK version should sway a lot of hatchback and hot-hatch buyers over to the Focus. The company has had great success with its Sync system, increasing the number of vehicles sold with the system installed. It is also well on its way to meeting new emission guidelines even with its trucks (which have been very popular even globally). Ford has introduced a technology similar to Fiat and Alfa’s ‘Multiair’ technology which allows the engine to produce more peak power and higher efficiency numbers, thus allowing engineers to put smaller blocks in trucks and vans. The company has made a real commitment to renewable energy as well. Ford announced that it will be installing a 500 kilowatt solar power collection system for its Detroit assembly plant. It will save Ford $160,000 per year in electricity costs; however more importantly it will be the largest solar facility in Michigan and will give the company vital experience with solar power.

If this is all true then why did the stock dip into the $9 range? There are several reasons I believe for this happening. First and foremost the stock receives heavy volume and one can often observes spikes around macroeconomic news. It would appear that over the past 6 months the stock has deviated from the fundamentals coming from the company and stock movements have been more based on expectations for economic recovery. What will most likely be the critical success factor for the stock will be if Ford can continue to show that it can improve its numbers and performance regardless if the economy remains soft. In the short term there will obviously some resistance to the stock breaking out above $14 as the stock peaked in April at $14.46 and fell until June.

There is a lot of confidence inspiring news such as Bill Ford being awarded back dated salary from 2008, on the basis of the company getting back on its feet. Ford made $2.7 billion last year and $4.7 billion in the first half of this year, its most profitable first half in more than a decade. Although these figures cannot compare to the company’s glory days, what is more important is that the figures are improving substantially.

Ford received another debt rating upgrade from Fitch on August 6th to BB-. This comes after a whole string debt rating upgrades started in March this year led by Moodys. Ford has made it known that it wants to get back its investment grade rating by late 2011 or 2012. The company has already retired $7 billion in debt saving $470 million in interest.

Ford seems to be doing everything right, improving its products, simplifying its business, focusing on the environment, and improving its Balance Sheet however will it be enough to lure investors back into US auto?

Ford, a strong turnaround.

Ford(F) was beaten up very badly a year ago, when there was problem after problem with the U.S. auto industry. That was reflected in the share price, 52 weeks ago the stock was trading around $2.50, today the stock is over $14. Yesterday there was excellent news for both shareholders and debt holders as Ford received an upgrade from Moodys to B2. Also F has outperformed many of its competitors with regards to the quality of its product; it has exceeded the quality of Volkswagen, Chrysler and Suzuki(http://www.chicagotribune.com/classified/automotive/chi-jd-power-vehicle-dependability-study-031810,0,1477320.story). Its market share has also increased its market share up to 19.2% in March 2010 from 14.6% in 2009.

Possibly one of the things that I put the most value on is that Ford is bringing the new U.K. versions of the Focus and Fiesta to North America in 2011. This is significant because the Ford focus has been the best selling car in the U.K. for 10 years, and the Fiesta has also done very well in the subcompact class since it was debuted. Currently 7,000 Americans have pre-ordered the Fiesta. While the number is not massive, for a sub $20,000 car its nice to see consumers wanting to buy the car already. Pre-orders show that there is some hype around the release of the car, and this may bode well for initial sales of the car.

I feel that with enhanced quality control, and new successful cars that have been shown to have strong sales internationally 2010 will be a very good year for Ford. The destruction of Toyota's perfect quality image has done nothing but help Ford. Honda has also recalled several thousand cars. As the Japanese auto makers are no longer viewed as bullet proof, and Ford has increased its quality the gap in consumers mind's between the Japanese and North American auto makers has shrunk. With all of this Ford will make a very good investment for the rest of 2010 and well into 2011. As America starts to emerge out of this recession, individuals will likely increase spending on new cars. Ford stock in my opinion will hit over $17-18 by fall 2010, and by 2011 the stock may be well over $20.

GM is down, but is it out?

GM once an iconic symbol of American industry has now fallen far from its highs of the 1950s and 1960s. In 2008 GM was the world’s second largest automaker in sales. On June1, 2009, General Motors filed for a government-assisted Chapter 11 bankruptcy protection. It is the third largest bankruptcy filing of the world. It can be expected that there will be significant changes with GM as it undergoes this restructuring. Hopefully it will emerge a more efficient and effective company that will rival foreign auto makers that have become so successful.
Taxpayers in the U.S. will end up with a 60% ownership in GM, with the union, creditors and the Canadian government owning the remainder of the company. GM will be getting rid of Pontiac, Saturn, Hummer and Saab, this will hopefully serve to remove unsuccessful brands and help to alleviate GM’s infamous brand overlap. GM will also close more than 2,000 of its 6,000 U.S. dealerships by 2010. That could result in more than 100,000 additional job losses.
GM as of June 8 has been removed from the Dow Jones industrial average, a distinction it has held since 1925, this is a symbol of how the iconic auto makers has fallen. The company will be replaced by technology giant Cisco Systems (CSCO). The new GM will have $17 billion in debt, rather than the $54.4 billion it had outstanding as of March 31. The unions' new contracts with the company and underfunded pension funds will not be cancelled or removed. The most important thing is not that GM lays off some workers and makes one time sales of brands but rather it must strive to become more competitive and rethink its business model. If GM does not offer more competitive vehicles then it will have similar problems in the future. GM will have to create a niche for itself and specialize in it, something that other competitors will not be able to do as well.
Recently GM’s brands, Opel and Vauxhall have been fought over by Magna, Belgium-based financial investor RHJ along with other bidders. German Chancellor Angela Merkel expressed her regret at General Motors' failure to choose a buyer for its German unit Opel, and said that a decision was "urgently" needed for the carmaker's future(Reuteurs). The German government wants to be assured that Opel will not shed a substantial amount of its 25,000 workers. Berlin has made clear they want Magna to be the buyer and are set to provide 4.5 billion Euros ($6.4 billion) in state aid to make it happen. Magna remains the favored candidate as of now.
Depending on how this deal will go through it can have a substantial impact on the auto industry. Certain companies may become more powerful as others become weaker. A new global giant may emerge, or historical iconic names may disappear but it is without a doubt that this financial crisis has reshuffled the auto industry and hopefully the public will benefit from more efficient and competitive companies. GM needs to standout from the crowd with projects such as the volt which will also symbolize to consumers that GM is leading the way for vehicles of the future.

http://money.cnn.com/2009/06/01/news/companies/gm_bankruptcy/index.htm
http://www.reuters.com/article/newsOne/idUSTRE57L0KF20090823

'Cash for Clunkers'

This has to be one of the few consumer spending incentive programs coming from the US that really excities me. The best thing about this program is that it actually seems to be working, and not only that, it is actually supporting the auto industry which has been struggling recently. The Car Allowance Rebate System, provides credits up to $4,500 for the purchase of a new car when turning in an older vehicle to be scrapped. Lawmakers had expected the first $1 billion to generate roughly 250,000 vehicle sales and last until about Nov. 1. The Department of Transportation said more than 200,000 sales have come from the program, and this could not come at a better time for the auto industry. Additional funding for the program has been passed in the house and is now waiting for senate approval. I believe that this is something that will pass especially given the success of the program relative to other consumer spending stimulus programs. One interesting opportunity I see with all of this is Auto Nation ticker: NYSE:AN. This has been one company that has benefited from this incentive program, and has exposure to a wide variety of makes of cars. I am personally going long this stock, as it is well poised to benefit if the additional funding is passed for the Car Allowance rebate Program. This will be an interesting one to watch.
http://www.bloomberg.com/apps/news?pid=20601103&sid=a1HW9CtfwJkg

GM gets three final bids for Opel

The three final bidderes are Canadian car parts maker Magna, Belgian-based investor RHJ International and China's Beijing Automotive Industries. Talks have been stalled after Magna wanted intellectual property and distribution rights in Russia to be included in the deal.
This is something that GM is not willing to compromise on. There is some controversy regarding Vauxhall plants and potential lay offs, Magna promised no plant closing until 2013. RHJ would save plants but may force pay cuts.

"GM is expected to give its preliminary findings on the final bids to the German and other European governments on Wednesday.
Next week, GM is expected to have a recommendation ready on which bid to accept. That will be put before its board and the US Treasury, which has a majority stake in GM." (BBC)

In my opinion this is excellent news, the faster that GM will be able to becomer a leaner and more efficient company the better it is for shareholders. In this case it will mean that the majority shareholder (the US government) will be able to let go of GM sooner than later. GM successfully streamlining itself will also be a strong symbol to the American consumer and the rest of the world that big US business will be able to recover and hopefully be better than before the recession. If GM can focus on new green projects such as the Volt, and eliminate the high level of overlap in their product lineup they may once again become a substaintial force to rekon with, all without having to give massive discounts to entice consumers.
http://news.bbc.co.uk/2/hi/business/8158569.stm