By Rom Badilla, CFA
In 2008 and amid escalating losses, the company, along with Chrysler and General Motors (NYSE:GM), sought a bailout but ultimately opted not to seek government loans. Since then, the company has made substantial progress on its turnaround as evident by its credit ratings. In early 2012, Ford Motor bonds were upgraded by Moody's to Baa3 and back to Investment Grade (S&P maintains its rating at BB+) from a distressed credit during the height of the financial crisis.
Ford Motor Company (CUSIP 345370BJ8)
- 8.875% Fixed Semi-Annual Coupon
- January 1 2022 Maturity Date
- $126.93 Dollar Price
- 5.13% Yield to Maturity
- 352 basis points Yield Advantage over comparable maturity U.S. Treasury (On the Run 10-Year)
- 'BB+' Rating by Standard & Poor's which falls on the High Yield spectrum
Ford Motor Company which is headquartered in Michigan, is one of the world's largest vehicle producers. It is the second largest U.S. based automaker and fifth largest in the world. The company sells cars and commercial vehicles under the Ford brand while selling luxury vehicles under the Lincoln brand.
Better than expected Earnings fueled by growth in North America: Ford reported $2.2 billion of pre-tax profits in the 3rd Quarter which is up $0.2 billion over the past year. Over that span, the pretax profit of the North American segment grew by $0.7 billion to $2.3 billion. The robust growth was fueled by an impressive pre-tax margin of 12% which is higher by 3.4% in the prior year.
Restructuring of European Operations: The European segment reported a pre-tax loss of $468 million. The loss was driven by slowing sales as the region continues to struggle with contracting economic activity. Suffice to say, the issues in Europe which are affecting the industry as a whole are not likely to turn around soon. That said, the company announced in late October closings in Belgium and in the U.K. which are expected to yield annual savings to the company. These restructurings are designed to return the European segment back to profitability by mid-decade. In the meantime, North American Operations should continue to provide a buffer for the company against losses from the European segment.
Further Reductions in Debt Likely to Continue: Ford has paid down its debt over the past 2 years. Since the 3rd quarter of 2010, Long Term debt has declined by $20.9 billion or a reduction of over 27%. Going forward, the company continues to generate significant Free Cash Flow ($4.4 billion over the past 12 months) which could be used to de-lever the balance sheet.
Upgrade Potential: As mentioned, Moody's upgraded Ford Motor to Investment Grade earlier in the year while S&P maintained its current rating at the top of the High Yield ratings spectrum. A move higher by the latter may result in significant price appreciation as the yield should converge toward comparable Investment Grade bonds of similar ratings (as a proxy, the Barclays U.S. Credit 7-10 Year Index is yielding 2.91%). If Ford can continue its turnaround and continue to execute, then a return back to Investment Grade for Ford Motor may be in the cards in the years to come.