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Long-Term Transportation Outlook

Written By Nick Hodge

Posted August 18, 2009

During these times of growing debt, recession, bailouts, and bewildering bonuses, it can pay to take a step back and look at the long view.

Making long-term asset allocation decisions during perilous market times is how smart investors constantly stay in-the-money.

One of the sectors ripe for rampant change is the transportation industry. And it’s important to pay attention to because its intricacies have major investment implications across multiple sectors — for all types of investors.

Seeing how major global players view that industry can offer interesting insights for your personal portfolio.

Ford — ‘Found On Road Dead’ No More

When I was growing up, the old saying was that Ford stood for ‘Found On Road Dead.’ This was mostly used during friendly man-spats about who had the best pickup truck.

As I recall, Chevy and Dodge fell victim to some unsavory acronyms, as well.

But those were the good ol’ days, when the Big Three were more worried about horsepower and head room than bankruptcy and bailouts. And if measured by today’s standards, Ford certainly comes out ahead.

Ford is the only leg of the American automotive stool that hasn’t broken. They’ve neither declared bankruptcy nor accepted a bailout.

That doesn’t mean they aren’t facing their share of problems. . . It just means they’re dealing with them the best. As such, it’s worth peeking through the lens they’re using. CEO Alan Mulally recently gave us the opportunity to do just that.

If you frequent this column, some of this stuff should already be glaringly apparent to you.

Long-Term Transportation View with Alan Mulally

In a recent Morning Edition interview, Mulally gave a soup-to-nuts view of Ford’s market view and strategy.

First and foremost, Mulally said, "The company believes that over time American consumers will be paying more for fuel." This should be a given by now, and you should already be planning long-term investments accordingly.

Mulally goes on, "you correlate very well the purchases of smaller, fuel-efficient vehicles with gas prices moving up." This is fact, not argument.

So to capitalize, Ford is first focusing on efficiency by "moving toward technologies like direct fuel injection and turbo charging, where we can improve the fuel efficiency for all of our vehicles no matter what size by over 20 percent."

This is a viable portfolio strategy as well. As the auto industry turns its focus to efficiency, take a look at the performance of companies providing it:

Automotive Efficiency Companies

That’s a couple of easy doubles from companies providing efficiency technologies to major automakers. That trend will continue, so be sure to take note.

So where else does the Ford CEO see the transportation industry headed?

"Following that [efficiency], I think we’ll see more hybrids." And he’s excited about it. With fervor in his voice (I caught the interview live), Mulally declaratively said, "one of the real positive things to look forward to is that we move to full electrical vehicles."

"Real positive" is putting it mildly. Batteries are quickly being turned to as oil’s replacement — at least for light-duty transportation needs. Ford is obviously interested in the technology. Toyota has filed thousands of patents hoping to license the proprietary know-how gained from its early work in the sector.

And even Warren Buffet, through Mid-American energy, has taken a huge stake in the industry. He took a $240 million stake in Chinese electric car and battery manufacturer BYD (HK: 1211) last September. Just 10 months later, that stake is worth $1.25 billion. The stock has climbed over 300% since his initial investment.

But a battery company doesn’t need Buffet’s blessing to balloon. As you can see from the chart below, a handful of battery stocks have made stellar runs as automotive industry fundamentals begin to shift:

Battery Companies

And again, this trend will continue. Electric vehicles are still very much on the periphery of mainstream auto sales. But it’s the smallest segment that grows the fastest.

Mullaly cites two things as crucial to electric vehicle ubiquity:

The key to that is the enabling technology on the batteries. The other part of it is the infrastructure. That’s where we’ve got some great work going on with the electric companies around the United States and around the world, where you actually generate the electricity clean. You use batteries to store the electricity and now the electricity is moving around where you need it and when you need it. And then, we will really have made progress to move all of us away from our dependence on fossil fuels.

What he’s talking about — whether he knows it or not — is the development of the smart grid, wherein cleanly produced electricity is stored and used for vehicles, largely eliminating the need for foreign oil. In his scenario, cars store excess wind and solar power by being plugged in overnight. They then use some of that power to get their owner to work the next day. Then, when plugged in at work, any excess power could potentially be used to power the air conditioner or to make a cup of coffee.

It’s not as far off as you think. And Ford, along with hundreds of other companies, is working hard to make it happen. Following their lead will prove to have a positive impact on your portfolio.

And they’re worth paying attention to. Ford stock is up ~400% since April, as investors take kindly to their new strategy.

The other two legs of the stool? The now bankrupt GM placed its remaining assets to the pink-sheet-listed Motors Liquidation Company. It’s a private company, 60% owned by the U.S. government, and has no plans of relisting this year. Chrysler is still 20% owned by flat-lining Daimler and 80% owned by private equity firm Cerberus, with Fiat joining the mix.

So there’s something to be said for following the right path. It’s paying off for Ford. Paying attention to the writing on the wall can pay off personally, as well.

Call it like you see it,

Nick Hodge