Ford CEO is worth a bet in Europe

After overseeing the automaker's historic turnaround in the US, Alan Mulally is looking to work another miracle on the other side of the Atlantic.

By TheStreet Staff Oct 29, 2012 1:16PM

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Ford emblem at the Chicago Auto Show JEFF HAYNES, AFP, Getty ImagesBy Ted Reed


Once again, Ford (F) CEO Alan Mulally is taking the lead in a massive restructuring effort.


Mulally, who oversaw the historic turnaround of Ford North America without a government bailout, is going for it again. He no doubt sees that the turnaround of Ford Europe, which began in earnest last week, could become his final miracle for the automaker.


"Ford has essentially written the playbook on automotive restructuring, given the results in North America," wrote Jefferies analyst Peter Nesvold, in a recent report about the automaker's plans in Europe. "We think they're going to pull this off."


Now is a good time for investors to zero in on the possibilities in Europe, given that Ford shares barely moved after the European restructuring plan was outlined on Thursday. They began the week at $10.14 and closed Friday at $10.36, mostly due to a 21-cent gain on Thursday.


"We believe that investors are underappreciating the plan, likely explaining the muted 2% upside to the stock (on Thursday)," UBS analyst Colin Langan wrote Friday. "Investor concerns likely center around the timing and certainty of the cost savings which begin in mid-2013 and the full run-rate not realized until 2014."


"A closer look at the underpinning assumptions suggest that the margin recovery is achievable, perhaps even beatable, should volumes recover faster," Langan wrote. For Ford to achieve a 6% margin by 2015, overall industry sales in Europe would need to rise 1 million units, while Ford would need to regain its 10-year average market share (by adding 170 basis points) and auto prices would need to recover by 2%.


"If Ford can reach 6% margin by 2015, its European Union profit would be $1.8 billion, improved from a loss of $1.6 billion in 2012," he said.


That would boost earnings per share by 20 cents, said Langan, who has a buy recommendation and a $14 price target for Ford.


Ford shares were down 5% for the year as of Friday, while GM (GM) shares were up 11%. Ford will report third-quarter earnings on Tuesday while GM will report on Wednesday.


TheStreet wrote on July 27 that it looked like a good time to bet on Mulally, with Ford shares at $9.


Mulally is 67 years old and is often asked when he will retire. A typical non-response: He told TheStreet in April that "the best is ahead of us (and) whenever I leave the Ford team will continue to keep Ford soaring." Ford Chairman Bill Ford has said that Mulally can stay as long as he wants.


Mulally could have left at 65 when he and Ford were on top, but he chose to stay. It does not seem likely that he would choose to walk away with Ford starting out on a winnable battle to turn things around in Europe.


On Sept. 5, 2006, the day Mulally signed on at Ford, the shares closed at $8.39. The Detroit Three, not surprisingly, were viewed as bankruptcy candidates. Ford shares slumped as low as $1.50 in February 2009, then began a recovery. The shares ended 2009 at $10, up 334%. They reached a high of $18.97 in January 2011 before beginning another slide.


Like Langan, Nesvold has a $14 price target and a buy rating. He noted that Ford is ahead of GM in its Europe restructuring, writing: "We estimate that Ford would be accomplishing these capacity reductions a full one to two years earlier than similar actions expected out of GM."



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