TGIF! I can’t complain, though, because we had a very solid week. We continued this week’s success yesterday with an Overnight Trade in Verigy Ltd. (VRGY). The company killed earnings yesterday evening, with an EPS of 0.22 vs. the expected 0.16. They beat revenue estimates and guided above estimates. With all that, I was expecting a nice 4-5% open. We didn’t get that and got out at 8.80. We got in at 8.60, so it was a solid 2.5% gain again for an Overnight Trade. We made some money, so I can’t complain. If the market had been good today, though, we would’ve made more.
So, it is another awful day in the markets. I am going to turn my attention to a new Long Term Investment…
Long Term Investment: Ford Inc. (F)
Thesis
All of us know the Ford story. The company that started the American auto industry and is an American legend. The same company that with the helps of GM and Chrysler seemingly destroyed the American auto industry is now…back! The company has seen an amazing turnaround since lows of 2008, and it has positioned itself with a number of moves to become an auto powerhouse once again. So, how they have attracted my attention: better cars, better reviews, downsizing/simplification, lower costs, and the downfall of Toyota.
The most important part of any automobile company is their cars. Do people want them? If they do, that is step one. For years, Ford automobiles were taking a backseat to the likes of Toyota, Nissan, and European cars. The company attempted to battle this trend by buying up Mazda, Jaguar, Volvo, and Land Rover. Yet, they continued to lack a focus on their own line. So, how did Ford turn this one around – The One Ford Vision. The company has a complete refocus on its own line and has stripped itself down.
The company’s first mission was to build better cars. The company is set to launch the Ford Fiesta. A microcosm of the redefinition the company is seeking. The car has good reviews, is green, and focuses on its customer that faces higher gas prices. The Fiesta is a car that people will actually want. It is ranked #1 out of 31 new affordable cars on USNews newest 2011 rankings.
The Fiesta is not the only car getting strong ratings. J.D. Power’s latest rankings show a number of the Ford cars making great strides. The company got four out of five stars on initial quality, tying or beating out BMW, Honda, Hyundai, Infiniti, Jaguar, Mazda, Nissan, Toyota, VW, and Volvo. Consumer Reports rated the Fusion its top rated sedan for 2010. The sleek, new car is the silver star of Ford. The new Ford Flex made Consumer Reports Top 10 Family Cars of 2011. The Kelley Blue Book’s 
important Top Ten Most Comfortable Cars contained a Ford with the Ford Taurus. The Ford Fusion was even named North America’s Car of the Year for 2011.
Further, the company has downsized. It sold off Land Rover, Volvo, Mazda, and Jaguar. The company is now focusing on Ford and Lincoln. This ability to sell off and downsize has allowed the company to refocus its efforts on creating the best line for its core line. By downsizing, the company loses revenue, but it may have been too big to succeed. While it lost out and undersold a number of its companies, the company’s firesale is going to bring a renewed freshness and quality approach to Ford.
Not only has the company been able to downsize, but it has been able to get concessions from its unionized labor. In 2009, the company lowered its hourly wages to levels with Toyota and other foreign companies. The company’s cuts should help them reduce their costs by $500 million every year. The ability to reduce these costs is extremely important to the success of Ford.
Finally, Ford has the great ability to make great strides during this time on its biggest rival, Toyota. The recall and problems with the foreign company has made many Americans skeptical and rethink about American auto companies. Further, while GM and Chrysler took a black eye for bankruptcy, Ford was able to keep itself afloat. Toyota’s market share has dropped from 17% to 15% over the past two years. Ford has risen 2%.
With GM’s IPO coming, the company may lose some market share, but the company has set themselves up for a great
recovery and future moving forward. The company is doing what automakers are supposed to do and create quality vehicles and the vehicles that people want to buy. While Toyota struggles, Ford is growing market share. The company has refocused itself on its own line, and it has a great future.
There is definitely some risk involved with Ford. The rise of GM is coming with Ford, but as GM rises, it gives the American car a better image in the world. The company also does not have a significant foreign exposure any longer, and it will need to grow in other countries with its Ford line. Further, the company’s ability to continue to grow and not be satisfied ever with what they are doing. What happened in America was that companies began to stop always want to produce the top line vehicles. They were satisfied with not moving forward at the rate they needed to move forward.
The company has the capability to double very quickly in share price if it continues its profitability and will be one of the greatest American turnarounds for an entire industry. The jury is still out…
Valuation
My fair value estimate for Ford is $22 per share based on discounted cash-flow analysis. The company is on the cusp of what could be years of cylical profitability. They are seeing 20%+ quarterly sales growth every month, and their quarterly earnings are starting to show the same results. The economy is definitely risky, but the company has the current lineup that is attractive and can remain that way for years.
Good Investing,
David Ristau
