Ford Is Cruising in High Gear; Polaroid’s Bleak Picture

Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Ford Motor Co. (F)

Jim: Doesn’t seem that long ago, Mike, that Ford and the other U.S. auto makers were in dire straits, but that’s changed considerably in recent years. Both Ford and its stock have been on a tear lately.

Mike: It’s not that often you find a company like Ford that’s both an industrial giant and also a “story stock.”

Jim: The story being?

Mike: Ford’s shopping spree.

Jim: You’re referring, of course, to Ford’s plan to buy Volvo of Sweden. You know, Ford already has passed General Motors as the most profitable U.S. auto company, and with Volvo . . .

Mike: . . . It’s about to pass GM in terms of sales, too, which would make it the biggest auto company again for the first time since Henry Ford ran the joint and Alfred Sloan was chairman of GM.

Jim: Correct. There’s more than bragging rights here, though. Volvo fills a big gap at Ford, namely popular cars in the $30,000-to-$40,000 price range. Volvo also could provide a spark for Ford’s overall car lineup, which has had its problems.

Mike: That’s right. Much of Ford’s prosperity reflects strong sales of pickup trucks, sport-utility vehicles and minivans, not cars.

Jim: In fact, its car line, led by the Taurus, has actually been losing share in the North American market. At the same time, their sales have become pretty costly for Ford to maintain, because they’ve needed rebates, special terms for dealers and so forth to keep what sales they do have.

Mike: And the Taurus is beginning to get a little long in the tooth.

Jim: Truth is, much of Ford’s success reflects its massive cost-cutting in recent years. I mean, it’s ripped billions of dollars out of its expenses, and that’s helped it post 11 straight quarters of rising operating earnings.

Mike: Which has boosted the stock, too.

Jim: As has the general state of the auto industry. Altogether, U.S. auto sales should be healthy again this year--probably around 15.5 million or so vehicles--with light trucks and minivans again leading the parade.

Mike: Now, we should point out that Ford’s stock is relatively cheap right now.

Jim: Which makes it even more of a buy, in my eyes. This stock has surged 60% over the past 12 months, to the upper 50s currently, yet it still trades for only 11 times its estimated ’99 earnings per share.

Mike: I absolutely agree. And there’s another factor to contemplate: Ford is paying close to $6.5 billion for Volvo and, even though that’s more than Ford wanted to pay, it still bid less for Volvo than some other car companies, notably Fiat of Italy. Yet Volvo picked Ford because Ford will be in a good position to exploit Volvo’s qualities and actually make something more out of that company. That bodes well as Ford goes about casting for other companies.

Jim: Here’s another reason to buy Ford. Even after the Volvo deal, Ford will still have $17 billion in excess cash, which it can use to buy other auto makers, buy back a ton of shares or do something else that would bolster the stock price. And I think another Ford buyout of a car company is likely, because everyone expects more consolidation in that industry.

Mike: In this industry it’s a given that more consolidation is inevitable, and there are a lot of smaller companies out there--BMW, for example, and maybe even Honda--that may be ripe for the picking.

Jim: Yeah, no one would have expected these deals a few years ago. But after the Daimler-Benz purchase of Chrysler, anything could happen.

Mike: We may see Ford turning into a a real powerhouse and perhaps the biggest industrial company in the U.S.

Jim: I do have one concern. If auto sales in general should go soft this year, Ford and the others might revert to their old habit of rushing out incentives--you know, 1.9% financing and all that--to keep market share. But that ruins profit margins.

Mike: As a consumer, I’m counting on it.

Jim: I know. But as an investor, I’d buy the stock anyway. The auto market remains healthy, Ford is quickly becoming the industry’s bellwether company and its stock is a bargain.

Polaroid (PRD)

Mike: We now move to Polaroid, which means we’re shifting from a company that’s growing bigger to one that seems to be on the verge of vanishing. Now, I don’t know about you, Jim, but the Polaroid Land camera and its instant pictures were an integral part of my childhood.

Jim: How so?

Mike: It was one of the greatest gadgets I’ve ever seen in my life.

Jim: Standing there waiting for those little pictures to develop?

Mike: That’s right. Just seeing those pictures gradually appear in front of your eyes, well, it was great magic and, of course, an enormously popular product for its time.

Jim: But unfortunately for Polaroid, that time is gone. In fact, when I hear the name Polaroid today, my first thought is: When was the last time you saw someone at Disneyland, or at a wedding, or at their kid’s ballgame with a Polaroid instant camera?

Mike: Good question. Polaroid is like the old movie star who, for one reason or another, gets back into the news, and you say to yourself, “Gee, I thought she was dead already!” Sort of the “forgotten but not gone” phenomenon.

Jim: Now, I know its cameras and their ability to deliver instant shots are still popular with insurance adjusters and salespeople . . .

Mike: And DMVs across the country.

Jim: And with movie prop people, set designers and so forth.

Mike: But if one thing is clear, it’s that there’s not enough of them to make Polaroid profitable over the long term.

Jim: Exactly. Polaroid is a company that technology has passed by. The development--excuse the phrase--of one-hour photo shops, throwaway cameras and digital cameras are all eating Polaroid’s lunch, because they’ve drastically diluted the uniqueness of instant photos. That’s not all. The whole photography market is a mature, slow-growing business, which is why Kodak and Fuji Photo Film are constantly beating each other over the head with price cuts. None of that helps Polaroid, either.

Mike: Now, Polaroid has undertaken very sharp cost-cutting to survive. Its work force, for instance, is down to well below half of what it was at its peak 20 years ago.

Jim: But that’s not helping Polaroid grow, as the numbers show. In just the fourth quarter of ‘98, it lost $4 million, and its sales for the whole year dropped 14% to $1.8 billion. Polaroid’s annual sales were higher than that a decade ago.

Mike: What’s gonna drive this business is some new gadget here or there, but it’s hard to see what Polaroid can come up with that will jump-start its sales.

Jim: Polaroid is trying, though.

Mike: Yeah, it’s got several new cameras in the pipeline, including a pocket camera that’s already doing well in Japan. It prints out tiny pictures that are expected to particularly appeal to kids, who can trade them and such. Polaroid is clearly hoping this becomes a schoolyard craze. But I’m sorry, I still don’t see much of a future for this company as an independent.

Jim: Wall Street hears you. Polaroid’s stock has plunged to about $19 a share from $60 in mid-’97. That tells us that investors remain extremely skeptical that new products will turn the company around.

Mike: If you’re a Polaroid shareholder, you might not be aware of this, but there was a bull market in stocks last year.

Jim: Now, there’s one twist to the Polaroid story, and that’s whether the company might get bought. Rumors are flying that Fuji might be interested as a way to further invade the U.S. market.

Mike: Though nothing has been announced.

Jim: True, but the speculation has been fueled by a California investor named Joseph Harrosh. He makes a habit of buying into down-and-out companies with the hope of a big payoff, and he has amassed a stake of nearly 10% of Polaroid.

Mike: Well, it’s nice that Harrosh has the ability to sit around and wait to see if something happens. But will it happen, and what will the premium be? The fact is, right now Polaroid is flat on its back, and it’s hard to imagine why anyone would pay much of a premium for this stock.

Jim: Yeah, I’m not sure even Fuji would be willing to pay much above the market price for Polaroid, especially since Polaroid is also carrying a heavy debt load, something around $800 million.

Mike: And even if a takeover eventually happens, there’s a great risk here that this stock will drop even lower before it goes higher. Why? Because Polaroid has had an alarming history of posting financial results that are even worse than Wall Street was led to expect. That’s certainly not a good sign.

Jim: And if there’s so much takeover speculation swirling around this stock, why has its price dropped so steeply and steadily in recent months? I mean, it’s virtually a straight line down.

Mike: Basically I think it’s time to relegate Polaroid to the heap of companies that had a great idea and had their day but weren’t able to move beyond it.

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Do you have a stock you would like to see discussed in this column? Michael Hiltzik can be reached at michael.hiltzik@latimes.com; James Peltz can be reached at james.peltz@latimes.com. Or write to either at Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.

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Ford Motor

Friday: $57.88

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Polaroid

Friday; $19.13