BUSINESSWEEK ONLINE : OCTOBER 11, 1999 ISSUE
COVER STORY

Can Nasser Get Ford's Stock onto a Smoother Road?
Maybe so, if his strategy to broaden income streams gets Ford off Detroit's wild cycles

Why would anyone want to invest in Ford (F) right now? True, it's arguably the strongest of the three major car companies. DaimlerChrysler (DCX) is in turmoil after reporting disappointing second-quarter results, and General Motors (GM) has more fat to cut. But Ford is still stuck in a notoriously cyclical industry, which seems close to peaking. The industry will probably sell at least 16.5 million vehicles in North America this year, beating the 16.4 million record set in 1986. But because of rising interest rates and recent declines in consumer confidence, many analysts expect sales to dip a bit in 2000. Inevitably, when an economic downturn comes, all the auto stocks will tumble.

Nonetheless, long-term investors can make a case for buying Ford now. For one thing, the stock is cheap: It's trading at only nine times analysts' 2000 estimates. Even more significant, the company is going through a major shift in strategy, spearheaded by its CEO of the past 10 months, Jacques A. Nasser.

If Nasser can execute his bold plans, he will smooth the ups and downs and turn Ford into the kind of consumer-oriented company that can deliver consistent earnings growth. His plan, says Lehman analyst Nicholas Lobaccaro, is to be the auto industry's General Electric. That company, once seen as an industrial relic, is now a perennial Wall Street favorite. "GE grows earnings again and again," says Lobaccaro. "Ford faces the same degree of skepticism in its future growth prospects." But he thinks Nasser could go a long way toward unlocking more value for shareholders. He urged clients to shift out of DaimlerChrysler and into Ford in a Sept. 23 research note, citing Ford's management strategy, new 2000 lineup, and low valuation.

25-75 SPLIT. For investors, the key to understanding Ford's potential for becoming a growth stock is to look at the economic lifecycle of cars. Right now, Ford's earnings come mainly from the upfront $20,000 purchase price made by most consumers. But car owners typically spend an additional $40,000 to $60,000 on maintenance, fuel, spare parts, and insurance during the 10 years of a car's life. "As a carmaker, you're only grabbing 25% of that revenue, and you're leaving 75% to other people," says Steve Girsky, an auto analyst at Morgan Stanley.

Nasser's plan is to expand into related service businesses with higher margins -- such as auto repair, insurance, and junkyards -- to tap into those other revenues. "That 75% of revenue is less cyclical, and Ford could carry a higher p-e multiple if it can capture it," says Girsky. "Investors would see the decrease in the volatility of earnings as a benefit."

Many investors are skeptical about the expansion into related businesses. But unlike Ford's diversification into financial services and defense industries in the 1980s, which was a disaster, the current expansion could be a "source of great competitive advantage for Ford," believes Merrill Lynch analyst John Casesa. For example, from its recent acquisition of Kwik-Fit, a chain of British auto-service centers, Ford could learn a great deal about the European market. "The automotive acquisitions will only create a better Ford, if they create a better core [auto] business and provide greater value to the customer," he says.

TRUCK ASSAULT. Even further in the future, investors may benefit from Ford's aggressive new Internet strategy. It has become the leader among auto makers (although some argue still late), in trying to harness the Web's power. Ford recently announced a plan with Microsoft's CarPoint site to allow consumers to build cars to order online, similar to Dell Computer's winning strategy for direct computer sales.

Still, Ford faces plenty of challenges. Several analysts point to existing problems in its core business, including some of its overseas divisions. "Europe and Latin America have got to be fixed," says Casesa.

Wall Street's biggest worry for Ford is increasing competition in the company's big profit center -- U.S. sales of minivans, pickup trucks, and sport-utility vehicles. New Japanese and German entries are hitting the market. And GM and Chrysler have been slapping unprecedented rebates on big pickups and SUVs, which could squeeze profit margins, says Girsky. "Their sources of earnings are very narrow," says David Healy, an analyst with Burnham Securities. "That's one of the reasons why Ford stock trades at such a modest p-e."

"NERVOUS." Some analysts say Nasser should solve these problems before shifting the company into distracting new areas. For example, Gary Hamel, chairman of Strategos, a Palo Alto (Calif.) consulting firm, believes Ford still has room for innovation in its current sales and service divisions. "Therefore, I am nervous when they're looking for greener pastures," he says.

Indeed, many investors prefer GM stock over Ford currently. David Sowerby, a Detroit-based portfolio manager with Loomis, Sayles & Co., owns GM mainly because, thanks to the punishing strike in the summer of 1998, the stock is still a bit cheaper than Ford. And he thinks the company has more to gain as it turns things around. According to First Call Corp., the consensus recommendation of analysts on Ford is 2.1 (on a scale where 1 is a strong buy, 2 is an outperform, and the S&P 500's average rating is 2.2). Meantime, they rate GM a 1.8 and DaimlerChrysler a 2.4.

For now, a bet on Ford would also be a bet on Nasser's ability to execute his bold long-term strategy as well as build a senior management team that can repair Ford's overseas divisions, steer it through the competitive landscape for trucks, and meet other challenges as they arise.

Because the industry seems to be at a peak, there may not be much upside to the stock in the near future. "The proof will be in the pudding several years down the line," says Girsky. But for now, Nasser is a CEO to watch, and Ford is a stock to add to your watch list.

By Amey Stone in New York and Kathleen Kerwin in Detroit

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