I wrote some initial posts about Mulally's arrival, in September of 2006, and early tenure at Ford here, and here.
I wasn't very optimistic at first, as this passage from the first linked post demonstrates,
"Will Mulally's sensible initiatives matter? Truthfully, I doubt they have the time. Still, oddly, I can't but help root for the guy. Maybe in 3-4 years, Ford will make my equity portfolio selection list. Although, my hunch is, not as an independent company. Perhaps as part of an alliance with Nissan. If it merges with GM, I would lower the probabilities of its performing sufficiently well to make my selection list."
I was more impressed in the next post, nearly two years ago, when I noted,
"But, as I have asked in prior posts about 'turnarounds' at other firms, what will constitute a successful turnaround?
To me, net income performance, impressive as it has improved under Mulally, is not alone sufficient.
The pattern and magnitude of a firm's fundamental operating results create investor perceptions that underpin a firm's attainment of consistently superior returns for its shareholders.
Unless Ford is planning on really strong, consistent double-digit revenue growth in the years ahead, it's going to have to achieve any consistent total return performance mostly by productivity improvements.
It's clear that the Journal likes Mr. Mulally very much. All three articles about him provide unfailingly upbeat, flattering profiles. And my guess is they are not wrong.
Even this piece's details about Mulally's pushing to sell Jaguar and Land Rover, redesign the Ford Focus, and attack inventory problems all ring with the sense of a really good manager at work.
Still, call me sceptical. It's not just that Mulally must haul Ford back from the brink of bankruptcy or sale. He must, in my opinion, then lead the company to several years of unexpectedly good performance, either with new revenue and volume growth, or incredible productivity gains, in order to provide the basis for consistently superior total returns for shareholders.
Can Mulally accomplish this? Who knows? I'm a 'show me' kind of investor, and Ford has years to go before it can possibly, in my view, be accorded the title of a 'successful turnaround,' or 'recovery.'"
The nearby five-year price performance chart of Ford and the S&P500 Index shows that Mulally is actually only even with the index after 3 1/2 years on the job.
Considering the risk inherent in owning a single equity, risk adjusting the implied returns would put Ford below the index.
Still, Mulally's Ford is still alive and kicking. He's managed to reduce hourly labor costs impressively, down to $50 from $75. Regardless of GM's inventory excuses, Ford did outsell GM this past month, which is a milestone. Ingrassia was certainly very positive in his expectations for the new Ford.
But looking at the second price chart of Ford and the S&P500, from 1977-present, provides a context in which to more soberly evaluate Mulally's and Ford's prospects.
The company's value managed to rise again in the mid-late 1980s, and again through the 1990s.
But its fall from its 1999 peak has been precipitous, losing nearly all the value built from its early-80's nadir. The steepness of the rebound in its equity price since last year has been nearly alpine-like. Such a relentless pace of price improvement and the implied total return is simply unlikely to be sustainable.
My proprietary equity performance research has uncovered many companies which rebound sharply, like Ford, and post a few years of outsized returns. Only to then fail to sustain the momentum and plateau, falling back to being a fairly staid, unremarkable company to own.
Ingrassia wrote glowingly of Mulally, and justly so. But he didn't touch on topics like longer term total returns for the recovering auto maker. It wasn't really the point of the interview.
So I will.
Thanks to global government support of various auto producers, industry over-capacity remains. Ford has to grapple with a government-owned and -subsidized competitor, GM, and a Congress and administration willing to and capable of attacking that failing auto maker's competitors, e.g., Toyota.
Ingrassia did get Mulally to discuss Ford's balance sheet challenges. This only hints at the real issue. In order to continue superior revenue growth, Ford will have to both out-compete rivals on many performance dimensions, both internal and external, as well as be capable of affordably funding such growth. But the sector, at least in the US, is at a crossroads.
Political expediency drives Ford to hybrids and alternative fuel sources for its cars, while end-user demand isn't necessarily there for the longer term. Nor is the economy healed, portending a potential slump in demand in the next few years.
Unless Mulally continues to pull more very sizable rabbits out of his hat at Ford, the pace of revenue growth, cost reductions, and, thus, total return performance, is likely to slow. Ford still competes in a business with too much capacity, a government-owned competitor, capital intensity and fairly volatile demand over time.
For all of the adulation given to someone like Warren Buffett, you don't see him piling into Ford, do you? No, he bought Burlington Northern.
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