The Auto Industry Gains Traction

By Justin Kuepper | May 01, 2008 AAA

Ford Motors (NYSE:F) is one automaker that appears to have orchestrated a successful turnaround. The automaker announced strong fourth quarter 2007 results that showed real progress on their plan to aggressively restructure, accelerate product development and improve their balance sheet. The firm cut corporate spending by $1.8 billion and improved North American operations by $2.5 billion compared to 2006.

The progress was further confirmed in the first quarter of 2008 when it achieved a profitable quarter with North American operations, improving nearly $600 million quarter over quarter. Continued cost reductions of $1.7 billion marked a continued improvement to the automaker's bottom line. Ford expects to reach profitability in its North American and total automotive divisions in 2009.

News of this successful turnaround caught the attention of legendary activist investor, Kirk Kerkorian. Kerkorian's Tracinda Corporation revealed a 4.7% stake and offered to purchase an additional 20 million shares of common stock in a tender offer at $8.50 per share. Kerkorian believes that Ford management, under the leadership of CEO Alan Mulally, will continue to show "significant improvements" in its results going forward. (To learn more about activist investors, see Activist Hedge Funds.)

Ford responded to the media attention by issuing its own statement in which executive chairman Bill Ford supported the tender offer and noted, "We today are seeing some high-profile investment activity and, as a result, intense media speculation about our company... Whatever the speculation or heightened interest in our progress, what is most important going forward is that each of us stays focused on executing our plan."

GM Puts Turnaround in Motion
General Motors (NYSE:GM) is another automaker that is beginning to see a turnaround in its business. Shares soared on Wednesday after the company reported a less-than-expected adjusted net loss of $350 million on revenues of $42.7 billion. These revenues were flat due to declines in North America that offset strong growth in other regions.

Unfortunately, GM faces some unique issues that could hurt its turnaround in North America. A strike at one of its suppliers, American Axle, and unresolved labor talks in Canada continue to put a question mark on future production numbers and costs. The American Axle strike alone led to production losses of around 100,000 units in the first quarter. This had a financial impact of about $800 million in earnings before interest & tax (EBIT).

Auto Industry Outlook
The automotive industry itself still faces strong headwinds. Aggressive monetary policies have reduced the risk of a credit crunch, but ended up causing a weakened dollar and surging oil prices. The result is a difficult short-term market with some optimism about the future, as employment and investment numbers continue to hold up.

GM sees industry-wide U.S. sales for light vehicles coming in at 15.3-15.5 million, down from 16 million at the beginning of the year. However, this is still higher than Ford's estimates of 15 million sales for the industry. These declines are largely attributed to sales of trucks and sports utility vehicles, which have fallen off amid record gas prices.

Domestic automakers continue to struggle with a difficult market in North America while relying on an overseas market to boost growth. Investors looking for a safer play rather than a turnaround may want to turn to stronger foreign automakers like Volkswagon AG (OTC:VLKAY) or even strong foreign automakers that are beginning their own turnarounds like Toyota Motors (NYSE:TM).

To learn more on how to profit from turnarounds, see Turnaround Stocks: U-Turn To High Returns, and Catching Comeback Stocks For Clients.

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