Saturday, July 25, 2009
Ford's Big Quarter
I saw in Friday's Wall Street Journal that Ford finally posted a profitable quarter. Granted, much of it was due to various restructuring-related, non-comparable income statement items. But evidently analysts and investors are whooping it up.
Truth is, Ford is unlikely to ever appear on my equity and option strategy's list of investments.
There are several reasons why Ford's quarterly performance is probably not the beginning of a pattern of consistently superior total returns which would truly reward investors.
For some perspective, observe the nearby 6-month, 2-year and 5-year performances of the price of Ford, compared with the S&P500 Index.
Ford is up 200%, meaning it's price quadrupled in the past six months, but is down 20% over the past two years. Over the past five years, Ford is down about 50%, while the S&P is just below flat.
Much of Ford's recent gains are simply the snap-back after the entire sector was in trouble at the end of last year. Like many other companies, values in the first quarter of this year were often far below longer term values, if the company survived. Thus, the six-month Ford stock price performance isn't really due to operating improvements.
It's not at all clear, and, actually, is pretty unlikely that this phenomenon can continue into the future.
Granted, Ford borrowed heavily while it could, during Mulally's early tenure, and generally cleaned up its balance sheet, thus avoiding GM's need to file for bankruptcy. But it still has the UAW with which to contend, and, now, is competing with two government-assisted auto makers, GM and Chrysler.
Finally, auto making just isn't the sort of business in which a has-been, ailing competitor like Ford is likely to suddenly surge forward and become a consistently superior total-return performer.
Barriers to entry are so low that Chinese cities are building cars. Newer vendors of alternative energy cars, such as electric, stand ready to compete Ford back to the point of merely average profits and growth.
Vehicle production just isn't the sort of business that has characteristics of defensible advantages, low union involvement, and high growth that are so often found in the best companies.
Ford reported one good quarter. Maybe it'll have one or two more. But the probabilities that Ford is going to be a long term bet for consistently beating the S&P500 just aren't very high. And that's as much a function of the sector in which the company competes as it is of the company's particulars.