Laif Meidell: Ford added value with Mustang

In honor of Hot August Nights, this week let's walk down automotive memory lane and reflect upon the past in order to learn about the present.

The Ford Mustang was introduced on April 17, 1964, just a little over 50 years ago. From the start, Lee Iacocca had a vison of an American-made four-seat sporty car with European styling, a product that, up to that point, was not being produced. But as Iacocca found out, convincing CEO Henry Ford II to build the Mustang was no easy task.

In the early 1960s, Ford saw the Edsel, named after his father, turn into one of the most popular flops in automotive history. The Edsel was known for being overpriced, overhyped and of poor quality, not to mention its styling flaws, such as its "toilet seat" grill. The Edsel was dumped at a loss of $250 million, making Ford skeptical of taking on any risky projects. It took Iacocca several trips to his office, but when Ford finally signed off on the Mustang, he told Iacocca, then head of the Ford Division, that the car better be a success — or else.

Ford gave Iacocca just a $45 million budget and 18 months from pencil to marketplace to get it done. To keep costs low, Iacocca suggested building the car with components that were largely off-the-shelf. For example, the turn-signal lever in the first Mustang came from the Fairlane and was built on the same assembly line as the Fairlane.

The original Mustang's base price was an affordable $2,400 out the dealership door, which met one of their initial goals to create a car that weighed less than 2,500 pounds and cost less than $2,500. Iacocca had planned on producing 80,000 cars within the first year, but sales took off with 22,000 cars sold on the first day and more than 1 million cars sold in the first 18 months, becoming a phenomenon.

What Iacocca knew was that the real money was in the sale of options. Although the base model was $2,400, with all the options the price of the car could top $4,000. As it turned out, as Iacocca expected, customers ordered their Mustangs with about $1,000 worth of options on average. At the time, the profit margin on a passenger car was roughly 30 percent, but options typically had a profit margin of 60 to 70 percent. That made the average profit per car about $1,370.

The 1966 Mustang model sold 607,000 cars. Using the profit analysis above, Ford made about $830 million pretax. If you convert that into current dollars using the Bureau of Labor and Statistics' CPI Inflation Calculator, it equals $5.8 billion. Analysts estimate that Ford made $10.8 billion in EBITDA in 2013, so the inflation-adjusted profits of the 1966 Mustang were over half the companies' earning power today. Good thing Ford decided not to cancel the project.

With the U.S. currently in the middle of the second quarter's earnings season, it's important to remember that what investors are looking for among other things is top-line revenue growth in order to justify higher stock prices. Although stock prices did well in 2013, revenue growth for the 30 Dow Jones Industrial Average stocks grew by just 0.6 percent. The last time double-digit growth occurred was in 2010, and was against the falling revenues of 2009, which is not that impressive of a feat when you think about it.

Over the past couple of years, some companies have boosted their share price merely by borrowing money at today's low interest rates and then used the money to repurchase their existing shares from the stock market (shrinking supply). Other companies have increased their bottom-line profitability by cutting expenses, such as laying people off. But with the Federal Reserve's stimulus about to end in a few months, what investors need to see is whether companies can grow their revenues and increase their value legitimately, just like Ford did it in the '60s with the Mustang or as Apple has done with the iPhone. This quarter's revenue reports will tell us a lot about the true strength of the U.S. economy.

For the coming week, we have the following economic reports to look forward to: Pending Home Sales Index and Dallas Fed Manufacturing Survey on Monday; S&P Case-Shiller Home Price Index and Consumer Confidence on Tuesday; Gross Domestic Product report on Wednesday; Jobless Claims and Chicago PMI on Thursday; and Employment Situation Report, Personal Income and Outlays, PMI Manufacturing Index, Consumer Sentiment and the ISM Manufacturing Index on Friday.

Laif Meidell, CMT, is the president of American Wealth Management a Reno-based Registered Investment Advisor, and is a subadviser to the AdvisorShares Meidell Tactical Advantage ETF (ticker: MATH), an SEC-registered fund, and can be reached at 775-332-7000 or laif@financial-health.com. Securities offered through Foothill Securities Inc., member FINRA/SIPC. American Wealth Management is a separate entity from Foothill Securities. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.