F BOMB

Ford. F BombGraphic, STOCKjAW banne, Quality View

MARCH 11, 2020.

 

 

Back

in 1957 Toyota landed at a derelict Rambler dealership deep in Hollywood. Nobody noticed. “Made in Japan” meant junk. Detroit owned American driving, and had since the beginning. During the mid-80’s the Japanese auto invasion reached critical mass. Buyers had noticed the quality difference. Detroit was caught lame, dopey, and bloated. The junk rolling off their production lines looked good, to them. Buyer felt otherwise.

 

Meanwhile, Japan’s spiritual egalitarian management style was producing a lean and reliable product line. Fuel economy mattered as well, and those quality-packed offerings carved up the U.S. auto market like a Samurai sword.

 

And yet it was business as usual for Detroit resisted.  Ford and GM have habitually leaned backward rather than toward a transformative future. During the Yom Kippur War in 1973 OPEC hit an oil addicted west with an oil embargo. Gas lines wrapped around the block as motorists physically pushed eight cylinder boats toward busy pumps.

 

Oil trouble sent Detroit halfheartedly toward EV thinking. The obstacles were huge. Did they keep thinking long-term? No. The second oil again flowed they jettisoned the entire EV concept and packed their shaky prototypes into the crusher. They didn’t even leave an EV pilot light sparking. Now Tesla’s all over their backs.The marvels of Detroit are many, including their repeated myopic refusal to tool for any future beyond next year. Detroit is a come from behind operator. That’s why Ford’s now an “F BOMB.”

 

 

Ford Explorer 2020
Back in Q3 last year Ford rolled out their redesigned 2020 Explorer. The redesign required a retooling of 96% of the factory’s work station, at a huge cost. Mistakes were made, leaving customers empty handed in the showroom. Out came the incentives and promotions and down went the profit margin on one of the company’s marque vehicles. At the time F had $32 billion in cash. Amazon tucks that much in their “miscellaneous” column–things like toilet paper and parking lot repaving.

Big

dividends come in hot on any view screen, particularly when markets foll defensive.  One could be forgiven.  We walked right into it like a blowing propeller.  Blind reaching’s human, and wrong.  Ford’s in at 10.17% this morning.  Can they pay?  Does it matter?  In such times of fugly  10% is red neon, and 20x the current 10 year.

 

Ford’s your truck unless it’s not, and Ford’s your stock until it’s not.  Hope’s not a strategy and a turnaround’s not either when you simply keep falling.  That’s Ford now.  Ford’s a value trap we should have seen and we’re in it up to our chin.

 

Mega-trends make major messes.  Think retail and Amazon.  Ford’s living that mess.  The dated product lines of inattentive companies are chewed to guts.  Ford and GM are both living that.  For years the American consumer raged to a deaf Detroit concerning quality issues.  Following years of relentless breakdowns, expensive repairs, all due to shoddy-produce product, consumers simply embraced Nissan, Toyota, and Honda.

 

 

detroit-1819179_1920
The auto industry built Detroit Michigan. Technically Ford’s in Dearborn. Not business lasts for more then a century without boom and bust, particularly one living off high-ticket products. Within those truths resides the reality that success breeds complacency. Decades of success breed entrenched bureaucratic complacency. They call it corporate culture. Changing ossified methods and work-flows which have in the past created stunning success is nearly impossible.

By

the mid 80’s Japanese business success had so capture American imagination that corporate American attempted to recreate such ways.  It didn’t work.  Americans are not Japanese.  The Japanese auto industry had caught Detroit sleep dopey and clueless and sales melted.  Toyota and Honda had carved out a space for themselves.  Nissan cut in as well, and Mazda, and Mitsubishi, and Subaru, and now Hyundai, and Kia.

 

Yet even eroding sales, a reputation for shoddy products, and public outrage, failed to bring about a transformation is American auto design and production.  Why go over this?  The legacy of these sweeping failures endures today.  It’s a clear failure of evolution, when times require revolution. 

 

Ford Motor Co F: NYSE 3-8-2020

Ford, 3-8-20
Ford(blue) vs. $SPX(orange).  Ford will survive, but in what form and size, and at what cost? CEO Jim Hackette just stated that “the dividend is safe for this year. But 2021 is unclear.” F is a one-pole tent act. That pole is their dividend(SJChart.)

Ford

is fighting multiple mega-trends in addition to arrogance as a result of decades of dominance.  Yet the core of the story for investors is share value.  Why own this stock?  Why does anyone own Ford?

 

 

Ford is a one pole tent.  The pole is their dividend.  Do you own it for any other reason?  Last month CEO Jim Hackett assured shareholders that “the dividend is safe–this year, but we don’t know about ’21.”  That was prior to the global spread of Covid 19 and the utter collapse of F’s China JV operation.  F’s dividend is now 10.17%.  The payout ratio is 1695.7%.  A healthy ratio is 40%.

 

 

 

What did management have to say about China?  They’re no longer even going to include Chinese numbers when reporting results.  Huh?  Well, of course.  What can you say about a total collapse?  “It happened.”  Which brings us back to the single pole tent of Ford as a whole.

 

 

 

No warning is possible when it comes to slashing a dividend.  Anything even smelling like a cut will be treated as the cut.  Ford’s shares are cascading lower by the day now.  Fact.  Were Ford to even hint at a dividend cut the share price would instantly implode, leaving no survivors.

 

 

The days of the automobile as personal image symbol seem over permanently.  Mega-trends are overwhelming both the internal combustion engine, and car ownership.  Millennials grasp the environmental crisis, have lived the credit-crisis, and the tougher job market immediately following.  Surveys clearly suggest that Millennial incomes and net worth are lower than both boomers and Gen X.  They realize and resent the mess they’re being handed by boomers.  Think national debt, deficit, and again, the environment.

 

 

Ford Motor Co F: NYSE 3-11-2020

Ford 3-11-20
A pile of ugly years. Six years of Ford’s lower highs and lower lows.

Manufacturing

is the very essence of efficiency, unless you want something different.  That’s also Ford now.  Two quarters back, in Q3, F rolled out the new 2020 Explorer.  The seats weren’t right, the infotainment systems weren’t activated, and more.  The fix?  All the way back to Detroit they had to go, because no where else could do it.  Customers stared at showroom models they couldn’t buy and were offered discounts and incentives to wait.  Margins and EPS suffered, and enthusiasm as well.

 

Two weeks ago CEO Hackett introduced to the media Jim Foley, Ford’s new COO.  And what did COO Jim have to say about his “priorities?”  Nothing really.  Why?  Jim prioritized everything.  He included everything, because Ford’s problems are everything.  No one survives the NFL thinking like that.

 

Ford is a dysfunctional cyclical in what will likely be a slowing economy.  International auto sales are projected to contract this year.  Smaller pies don’t help struggling producers, and cheaper money alone can’t solve that.

 

 

Key Speakers At the Ford Motor Co. City Of Tomorrow Symposium
Ford CEO Jim Hackett. Streamlining the product line down to trucks, SUVs, and EVs my work. But where will the share price be before it reverses it’s downward slide?

Turnarounds

take time and their progress difficult to assess.  All we really know is that $11 billion has been devoted and less then half of that spent.  More accurately Ford is engaged in a wholesale transformation.  A revamped product line isn’t the only issue.  The future form of mobility is the larger future–the very role of the “car” lies at the heart of Ford’s problems.  Increasingly people properly balk at paying up huge for depreciating possessions that sit idle 95% of the time, even more so when those possessions mean planet death.

 

ESG or impact investing is playing an increasing role in equity decisions.  Will fund managers continue to support traditional auto companies?  For most there exists a right and a wrong side to environmental issues.  Ford states that they will have forty EV models on the market in the near future.  They have twenty product launches in the coming two years.  That’s roughly 1 every 5 weeks(5.2 precisely.)  And after the mashed Explorer launch?  Good luck with that.  As always good luck and savvy investing.

 

 

 

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Additional resources:

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