"I've said that over and over again," Shanks said. "Back in the restructuring of North America and a great recession, we invested very heavily in the business."
The point was that Ford's fortunes don't follow a straight line, but rather face ups and downs for which the company must be prepared. Shanks recalled how Ford took out a $24 billion loan in 2006, how "it gave us the ability to survive the downturn," and how, "more importantly then all, it gave us the ability to continue to invest. We continue to invest because we know the business is cyclical."
Now, with the auto business strong, Ford is doing the same thing it did when the business was weak. It is investing in the future, a policy straight out of the Alan Mulally playbook. (When Mulally was at Boeing, the company" developed every new airplane during the worst of times," Mulally said in a 2009 interview. ) Said Shanks, "As we are looking forward, we are growth driven, we are committed to be a much bigger player in the business and to expand for the benefit of all of our shareholders -- not growth for growth's sake, but profitable growth."
Wall Street doesn't like this stuff, because Ford said it will sacrifice 2014 profit in favor of future growth. It said profit would fall from about $8.5 billion this year to between $7 billion and $8 billion in 2014. Investors sold off shares Wednesday and into Thursday. Ford shares closed Tuesday at $16.70 and closed Thursday at $15.30, a decline of 8%. For the year, shares are up 18%.
Most analysts still buy the Ford growth story, although many admit they did not see Wednesday's announcement coming. Ford said it would introduce 16 new models in 2014, after introducing just five in 2013. "We had not contemplated this number of launches," wrote CitiBank analyst Itay Michaeli. "It puts near-term pressure on costs/volume, but offers 2015 upside."
A key to the predicted earnings decline is the expected introduction of a new F-150 pickup truck. Making a change in the best-selling U.S. vehicle is probably necessary, given the new GM (GM) Silverado, but it is also expensive to sell off old trucks and reduce production while gearing up to produce new trucks. Ford makes an estimated $7,000 or more in profit on each F-150.
The Detroit News recently reported that Ford dealers are stockpiling the 2014 F-150 in advance of the launch of the 2015 model. Ford will show the new truck at the Detroit Auto Show in January, a source told the newspaper, which said production of the current F-150 could drop as much as 10% next year because of retooling at the Dearborn, Mich., and Kansas City, Mo. truck plants.
Will this be one last project for Mulally? He is getting to the end of the restructure of Ford's Europe operations, which Shanks said will be profitable in 2015. Ford announced its Europe restructuring plan in the last week of October 2012, when shares were trading in the $10 range. Our story was titled, "Alan Mulally, Who Fixed Ford in the U.S., Is Worth a Bet in Europe."
Isn't making a change in F-150 at least as challenging and important as trying to fix Microsoft (MSFT)? The Mulally-to-Microsoft story seemed to have finally run its course this week, not to say it doesn't bubble to the surface now and then, but it is likely that the F-150 introduction will be Ford's biggest event in 2014, just as the Silverado introduction was GM's biggest event in 2013.
In general, analysts have reduced 2014 estimates and price targets for Ford, but have maintained buy ratings. Sterne Agee analyst Michael Ward's report was typical. "The fourth quarter guidance and 2014 outlook were below our assumptions," wrote Ward, who cut his 2014 estimate to $1.40 a share from $1.90 a share and his price target to $19 from $21. (Several analysts reduced their estimates to $20.)
"We expect Ford's stock to be volatile over the next few weeks as the market adjusts to the updated assumptions and anticipates the January board meeting and Detroit Auto Show," Ward wrote. "Longer term, an improved balance sheet, earnings acceleration in 2015, and yield support, along with the likelihood of more favorable capital allocation for shareholders over the next few years, supports our buy rating."
In sympathy with the decline in Ford shares, GM shares fell modestly. GM closed Tuesday at $41.53 and closed Thursday at $40.30. The decline was 2%. GM shares are up 40% for the year.
"We see little read-across to GM (or suppliers) from Ford's announcement," wrote J.P. Morgan analyst Ryan Brinkman. "If anything, GM could benefit from the lost production of important Ford vehicles" like the F-150. GM could, however, be hurt by the competition in 2015 "as Ford fields a more competitive lineup supported by factories running more efficiently."
Written by Ted Reed in Charlotte, N.C.
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