Our 2010 CEO of the Year Drives Success (Morningstar selects Ford's Alan Mulally)

Our 2010 CEO of the Year Drives Success Mulally's achievements position Ford to thrive in a very hard industry. By David Whiston, CFA, CPA, CFE | 01-05-11 | 12:00 PM

F) is the Morningstar 2010 CEO of the Year for good reason. Auto manufacturing is a tough industry in which few participants are able to garner long-term competitive advantages. It is a viciously cyclical business with high fixed costs and powerful unions to keep happy, and consumers have no reason to keep buying vehicles from the same manufacturer. As such, management prowess, or lack thereof, is more critical among automakers than in industries with stronger business models.

About the Author David Whiston is a senior stock analyst with Morningstar. Contact Author | Meet other investing specialists

The changes Mulally implemented since joining Ford have radically transformed the company and set it up not just to survive the crisis, but thrive as a highly profitable automaker. Though he's winning our 2010 award, Mulally's achievements actually began several years ago. The first move he made after becoming president and CEO in late 2006 was to convince Wall Street to lend Ford $23.6 billion. This was an all-or-nothing act for Ford since it had no additional access to the credit markets.

Then came the recession. Ford was battered as the market tumbled and gas prices skyrocketed in 2008, and the stock traded barely over $1 late that year. Although the company was suffering and burning billions of dollars of cash, Mulally's early actions to shore up the balance sheet meant Ford was the only automaker to not take taxpayer-funded bailout money in 2008 and 2009.

Eventually the capital markets thawed and auto sales rebounded enough for Ford to start turning a profit. The goodwill from not taking bailout money combined with an excellent new product lineup (also thanks to Mulally's leadership) enabled Ford to gain over 100 basis points in U.S. market share in 2010, more than any other automaker. The market has rewarded Mulally and Ford shareholders as Ford's stock traded over $17 per share in 2010, and we think the best is yet to come.

Cars People Want A superior vehicle is what will ultimately get customers into a showroom, and Mulally correctly recognized that fuel economy laws and the threat of high gas prices required Ford to be less reliant on light-truck models. One of his first product moves was to bring back the Ford Taurus full-size sedan, a product that has sold very well. The Taurus has won Kelley Blue Book's best resale value award in the full-size car segment the past two years. Other Ford models are also showing noteworthy improvements. The 2011 Ford Mustang GT won the same award in the high performance car category.

Furthermore, the company claims that the "projected resale value of 2010 Ford, Lincoln and Mercury vehicles after 36 months in service increased by an average of $1,310 per vehicle compared to the 2009 model year – the industry's largest increase among full-line manufacturers." These higher residual values come from the fact that Ford now makes cars people actually want to own instead of vehicles that are purchased only because of heavy incentives.

This success even applies in the subcompact segment with the new Fiesta, which Ford reported in the fall to be posting sales prices greater than vehicles in the segment above it, such as the Honda Civic. The Fiesta is winning profitable market share in traditionally import-friendly markets such as California and Florida, and only 7% of American Fiesta buyers are opting for the cheapest trim package.

In addition, Mulally's decision to add more technology into vehicles via MyFord Touch has brought a new generation of consumers into Ford showrooms. Six out of 10 American Fiesta buyers are new to the Ford brand, which could mean future sales of more profitable Lincoln models as these customers become wealthier. Mulally believed Americans would pay up for smaller cars if they were equipped with premium amenities, and he was right.

We also applaud Mulally's 2010 decision to terminate the Mercury brand. The brand had become quite irrelevant, and without it, Ford can devote its efforts to making the blue oval brand the top-volume brand and turning the Lincoln brand into a marquee luxury name. Plus, Mulally's decision to divest non-core assets such as Volvo, Jaguar, and Land Rover not only allowed Ford to focus on its core operations, but the sale proceeds strengthened the balance sheet.

Mulally made it a priority in 2010 to start paying back the debt taken on in 2006, and we think the amount of debt paid back last year was astounding. The company reduced automotive debt by a net $12.8 billion and lowered annualized interest costs by nearly $1 billion. Ford automotive finished 2010 in a net cash position--well ahead of previous guidance. We felt so highly of Ford's debt stewardship and debt reduction actions that in 2010 we became the first firm to award Ford an investment-grade credit rating (currently BBB-).

Manufacturing Efficiencies Manufacturing is another key area of change Mulally brought to Ford. He wisely realized that the firm had way too many option packages and vehicle platforms. Consolidating the number of choices of paint or vehicle console layouts, for example, greatly reduces expense yet still meets the majority of customer demands. Mulally also implemented the ONE Ford strategy, which entailed many initiatives such as only producing to meet demand and implementing common vehicle platforms worldwide.

Ford seeks to have 12 global production platforms by 2013, down from 25 in 2009, according to Automotive News. Mulally was right to copy a strategy the Japanese automakers have been following for a long time. Fewer platforms mean more efficient manufacturing by getting more units from each platform, saving development and materials costs. Making more vehicles from the same platform also means Ford can change production lines faster to meet changes in demand from events such as a spike in gas prices. Ford is ahead of its American competitors in this critical flexibility game thanks to Mulally's vision.

Mulally has not only improved efficiency but also quality since taking over. The Ford brand ranked fifth overall in the 2010 J.D. Power and Associates Initial Quality Study, ahead of all three large Japanese competitors in the United States. In fact, the four brands ahead of Ford were all premium and luxury names. We think this is an amazing turnaround for an American automaker that had long been regarded as only capable of making pickups and SUVs.

Outstanding Management and a Bright Outlook Although Ford still has a ways to go on its recovery (in particular increasing car models in its U.S. sales mix, growing in emerging markets, and raising Lincoln's cachet), we think Alan Mulally's achievements are outstanding and deserve recognition. Some critics will question our decision given Ford's low Stewardship Grade, but that grade is based on the dual share class structure that preserves the Ford family's control. Mulally's actions are separate from this grade, and his outstanding accomplishments discussed above deserve recognition.

Many of the changes were put in place prior to 2010, but last year was one in which the company and its stock really started to reap the rewards of Mulally's vision. We continue to believe that U.S. light-vehicle sales are millions of units below normalized levels, so we expect Ford Motor Company to keep growing earnings and generate strong free cash flow under Mulally's leadership for several years to come.

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