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Worst 10-year performers: Ford flames out with Firestone tire scandal

Posted Jul 30th 2008 8:00PM by Elizabeth HarrowElizabeth Harrow RSS Feed
Filed under: Major movement, Bad news, Ford Motor (F), Scandals, Oil, S and P 500

In this series, we take a look at the 25 stocks on the S&P 500 Index (SPX) that have turned in the worst performance during the past decade -- what went wrong, and what happens next.

Though it's possible that sentimentality may have influenced the vote, an expert panel assembled by the Global Automotive Elections Foundation named Ford Motor Company's (NYSE: F) Model T as "Car of the Century" in 1999.

Viewed from a glass-half-full perspective, this was an honor. From a less rosy viewpoint, the award also spoke to the relative lack of success enjoyed by Ford's automobile offerings in the hundred years that have passed since the Model T's introduction.

What went wrong? At No. 8 on our list of SPX underperformers, F lost 85% of its value during the 10-year period that concluded on June 30, 2008. In April 1999, Ford seemed ready to retake its 1994 peak at $40. However, the shares climbed only as high as $38.72 before embarking on a long-term descent.

Things seemed to be going well for Ford in 1999. Threatened strikes in the U.S. and Canada were staved off hours before deadline, and the company reported record model-year sales of more than 4.11 million. However, Ford also unveiled plans to spin off its parts division, echoing an identical move by General Motors (NYSE: GM) that dented the latter's financial results. The auto maker was also attempting to redesign its Taurus -- a sedan that drove robust sales through the '90s, although consumers were already beginning to defect to smaller, lighter vehicles.

Ford reacted to the changing auto landscape by ramping up marketing efforts on its compact Focus. And, in a move unusual for a producer of gas-guzzlers, the company admitted in 2000 that SUVs were both unsafe for drivers of smaller cars, and overly harsh on the environment. Ford pledged to address both issues on future redesigns,s in a move that seemed to both puzzle and delight environmental watchdogs. Shortly thereafter, production was scaled back on the Excursion SUV due to weakening demand.

Elsewhere, other fundamental pressures were creeping in. Several European brands were under the Ford umbrella by this point, including Aston Martin, Jaguar, and Volvo. Unfortunately, due to unfavorable pound/euro exchange rates, Ford was forced to scale back production at its English facilities. Plus, the company came under fire when regulators alleged that known safety concerns about recalled Firestone tires were swept under the rug by Ford executives. Simultaneously, a California judge ordered Ford to recall two million vehicles that were sold despite the company's knowledge of a faulty ignition system.

Ford shares suffered as a result of the tire debacle, and fallout from the scandal would plague the company for years. It didn't help that the entire auto industry was experiencing a sales slowdown. By October 2001, Ford said it would cut its dividend for the first time in a decade; in early 2002, plans were announced to lay off 20,000 workers. Meanwhile, Japanese rival Toyota Motor (NYSE: TM) was winning over some old critics by opening plants in the U.S. By 2006, Toyota would overtake Ford in U.S. auto sales. It was a year in which Ford -- saddled with increasingly unpopular vehicle offerings and rising health-care costs -- lost $12.6 billion.

What next? The auto maker is still grasping to get a firm hold of its own bootstraps. During the past year, Ford sold its Aston Martin, Jaguar, and Land Rover brands, in an attempt to trim some fat and regain focus on its core models. Recently, the company ran an ad campaign trumpeting the results of a survey which revealed its quality was now on par with Toyota's (a questionable tactic that may have only served as an unpleasant reminder to consumers).

Meanwhile, record-high oil prices have only served to exacerbate pressure on the auto sector. Ford shares now trade near $5, a far cry from their previous heights. Most troubling, the company has failed to mimic the previous success of its Taurus. David Healy of Burnham Securities is one of many analysts who are bearish on the stock. As he recently noted to a Dow Jones reporter, "Ford is pretty thin on vehicles customers want right now."

Ford's struggles were highlighted in its second-quarter earnings report on July 24. The company swallowed a loss of $3.88 per share, easily outstripping analysts' consensus estimate for a loss of 27 cents per share. During the quarter, Ford recorded $3.5 billion in write-downs on its auto business, and another $2.1 billion on leases at its credit arm.

Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the weekly video series Option Basics on SchaeffersResearch.com.

Tags: F, Firestone tires, Ford Motor, FordMotor, gas prices, Taurus

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Last updated: November 27, 2009: 11:32 AM

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