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  Ford? At the moment, there are better ideas

BENJ GALLANDER and BEN STADELMANN

Thursday, November 28, 2003

One of our favourite quotes was rendered by Thomas Hoyne, a one-time U.S. marshall, lawyer, mayor of Chicago and founder of the University of Chicago: "Nothing is as frequently overlooked as the obvious."

We like to think that this is often true in investing, which is why we focus on discovering situations where the probability of being right is appealingly high. This does not eliminate mistakes, but it reduces their numbers.

We'd also apply that thinking to the craving for lower car insurance rates. Our culture fears accidents, and we have a solution: forbid people from using use cell phones when their car engines are running.

Research clearly indicates that using a phone while driving increases the number of accidents; some studies suggest the increased risk is comparable to that incurred by driving under the influence of alcohol.

Certain jurisdictions have already legislated against blabbing on phones in running vehicles, and why this isn't the law across Canada is beyond us. Fewer phones in cars, fewer accidents, lower rates. Seems obvious to us.

And what happens next if insurance rates go down? We bet many people who are currently discouraged from owning a car because of the high cost of insurance will make a purchase. This will assist, to some degree, the auto makers; companies that make their livelihoods in related sectors will also reap benefits.

One beleaguered company that would profit is Ford, perhaps the biggest "also-ran" in the automotive segment. The company is plugging away, but is just one cough from needing to be put on life support.

Ford is hobbled by a debt load almost a quarter the size of the entire junk-bond market; it produces cars that are less exciting than its rivals'; and management's capabilities are questioned by many. Put it all together, and survival is definitely an issue.

Yet the stock — currently trading at about three times book value — isn't cheap, and management has been selling more than buying.

Scott Sprinzen, an analyst at Standard & Poor's, failed to be impressed by recent quarterly profits, arguing in a recent report that "Ford's profitability and cash flow remain poor, and S&P believes that only limited improvement will be achievable over the next few years."

Management has been trying to turn around this lumbering behemoth; the introduction of 14 new models if upcoming, as is an investment of $325 million (U.S.) in new transmissions that will boost fuel economy in its larger vehicles.

However, the larger the enterprise, the longer a turnaround takes. We appreciate the new direction and feel that overall it augurs well for the future, but it would be premature to suggest that other major obstacles that might drive this machine into Chapter 11 aren't lurking in the fog.

Ford, whose stock currently trades around $13 (U.S.), climbed towards $40 a little over four years ago. While this target seems rather lofty, a price of $20 or more is easily within reach if the company's initiatives prove successful; in fact, a longer upward drive is not difficult to contemplate.

While Ford is on our Stock Watch list, we would not buy it yet. We'd first prefer to see the company overcome some of the major speed bumps that lie directly ahead. In the meantime, we'll put our hands firmly on the wheel at nine and three and quit gabbing.


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