New CEOs Should Keep These Stocks On Course
The forthcoming changes in these firms' executive offices shouldn't make waves, as the new helmsmen are wise choices.
Market Update
Two well-known companies in their respective industries announced succession plans Thursday for their chief executives.
Ford Motor (F) confirmed what has been the worst-kept secret in the auto industry. President and CEO Alan Mulally, 68, will retire July 1 after nearly eight years, and current COO Mark Fields, 53, will succeed him in both roles. Fields will also join the board of directors at that time. We are not changing our fair value estimate or moat rating on this news. As we wrote in our Jan. 8 note, we did not expect Mulally to stay beyond this year because he has accomplished the turnaround Bill Ford hired him to do.
We would have liked Mulally to stay for many more years, and Ford had previously said he would remain in his role until at least the end of 2014. Earlier timing of a departure than previously announced does not trouble us because we believe Fields is ready to take the reins. Fields joined Ford in 1989 and has run many current and past Ford divisions such as Mazda, Ford Europe, the former luxury division Premier Automotive Group, and Ford Americas before becoming COO in December 2012.
We also said in our April 21 note that we did not expect Fields to deviate much, if at all, from Mulally's One Ford strategy. Fields confirmed this opinion in a press conference Thursday--if anything, he sounded as if he wanted to accelerate the current strategy, though no details were given. Fields also said there would be no personnel changes among the management team, which we hope is true because we think Ford's senior leadership is a strong veteran group.
We expect no major changes in strategy or vision for Ford under its new leader, but we would like to see the company buy back its shares. The stock currently trades well below our fair value estimate, and we think the company is setting itself up to have a strong 2015 in its key markets of the U.S., Europe, and China as long as the macroeconomic environment does not dramatically, and unfavorably, shift. For now investors get paid to wait for the turnaround with a dividend yielding more than 3%.
Yum Brands (YUM) also outlined a succession plan for current CEO David Novak. Novak will make the transition to the role of executive chairman Jan. 1, 2015, with current Taco Bell CEO Greg Creed taking over as Yum's CEO. In conjunction with the CEO succession, Novak plans to form the office of the chairman, which will include vice chairman and Yum China CEO Sam Su and Creed, to develop the longer-term strategic vision for the company.
There is no change to our fair value estimate or our Standard Stewardship Rating based on this news, and we view Creed as a wise choice to succeed Novak. Under Creed's leadership, Taco Bell has been one of the bright spots in the otherwise lackluster U.S. quick-service restaurant category the past few years, highlighted by exceptional product innovation (namely Doritos Locos Tacos and the Cantina Bell platform). Creed has helped to position Taco Bell as a potentially global brand, with management targeting $14 billion in system sales by 2022, driven by new unit development, daypart expansion, and other store productivity measures. We believe many of the initiatives Creed deployed at Taco Bell can serve as a blueprint for productivity improvements systemwide, and they add conviction behind our consolidated company estimates calling for average annual revenue growth of 9% during the next 10 years and operating margins approaching 20% by 2023.
On the whole, we take a positive view of Yum's corporate governance, backed by a seasoned management team with a record of balancing growth and profitability. Our Standard stewardship rating is based on largely on underperformance in the United States and other developed markets, though we'd consider moving our rating to Exemplary if fundamentals in these countries continue to improve, based on the company's recent segment reorganization plans and management changes.
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