Wednesday, November 10, 2010

CNBC Stumps For Ford

CNBC is pushing its special program on what it calls Ford's "turnaround," which apparently airs on the network this evening. In support of the documentary, the morning program orchestrated an on-air debate/discussion involving the network's auto reporter, Phil LeBeau, ex-every US auto company senior exec, Bob Lutz, former Wall Street Journal senior exec and Pulitzer Prize winning author Paul Ingrassia, and one or two other pundits.

As I've contended in many prior posts, as well as Alan Mulally has run Ford since his arrival, it hardly constitutes an enduring turnaround.

Bob Lutz, amidst his usual gushing, pointed out that GM, Chrysler and Ford all nose-dived, in terms of share price, during the financial crisis of two years ago. Echoing Holman Jenkins' recent WSJ editorials, on which I wrote here and here, Lutz contended that Ford's survival and subsequent greater prosperity was a matter of luck.

As he said this, Paul Ingrassia grew increasingly agitated, shaking his head. Given the "last word" in the debate, Paul quickly cited some capital management facts regarding GMAC and Ford's borrowing pre-crash that he felt demonstrated Ford to be the better-managed of the two companies.

I would have loved to have seen an on-air debate between just Ingrassia and Jenkins on the subject of GM vs. Ford for the past five years.

My last Ford-centric post was in March of this year, on the occasion of Mulally's interview in the Journal. I won't quote extensively from it, but merely observe that Ford has, for decades, experienced a sort of boom-and-bust pattern.

It's not hard to see why CNBC wants to do a big Ford special, is it? They showcase an advertiser, ensure continuing, and better access to Mulally and various Ford debuts, and, in my opinion, prematurely anoint the company as a turnaround wonder.

The problem is, as I've written before, one of timeframes and measurements. Holman Jenkins, in his second editorial defending Rick Wagoner, lamented the focus of so many observers, and probably investors, too, on share price performance. However, like it or not, that's what investors get. Whether a company is hiring more people, doing good works, etc., is, to public shareholders, really beside the point, unless those activities result in better-than-average total returns over time.

In that regard, I hardly think Ford's post-crisis share price snap-back constitutes a long term return to solid, consistently superior total return performance. What I wrote in that March post I believe still holds true,

"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

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
Perhaps demand for cars and trucks won't soften in the year ahead. But this sector is still one in which pricing power is very hard to achieve. Regardless of Mulally's great job in preparing Ford for the 2008 crisis, and managing to bring it out of that crisis in good shape, it's far from home free. It remains a firm with many competitors, a challenge to differentiate its products when much of the value-added of cars comes from vendor subsystems, and a unionized workforce.
I'd hardly say Ford's recent survival without resorting to Chapter 11 equates with it having turned around for good. Right now, it appears to be simply another upward move in a cycle the company has repeated for decades.

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