Will Ford Survive without a Bailout?

For a guy not asking for anything, Ford (F) CEO Alan Mulally was awfully agreeable when he came to Washington late last year to testify about a possible auto bailout.

Mulally said that Ford wasn’t seeking any kind of government loan at the time, unlike General Motors (GM) and Chrysler, which have since gotten $15 billion in aid. Yet Mulally sat with his GM and Chrysler counterparts, patiently listening to lawmakers fulminate about how much better Detroit’s Japanese competitors are. Ford submitted a public “viability plan” describing its problems and explaining in detail its turnaround plan. Mulally even abandoned the corporate jet when that fiasco developed, driving to Washington for Round II like a humble supplicant.

Ford still says it isn’t seeking federal aid, but its case is looking weaker and weaker. The automaker lost $5.9 billion in the fourth quarter of 2008, and a staggering $14.6 billion for the whole year. The awful numbers aren’t surprising, since everybody knows the auto industry is in a rapid tailspin.

But the numbers the analysts are watching most closely are cash burn and liquidity – since once the firm’s available cash is gone, it will probably have no choice but to go to the lender of last resort, the feds. And those numbers are going in the wrong direction, needless to say.

Ford burned through $7.2 billion in operating cash in the last quarter, more than analysts had expected. That left Ford with $13.4 billion in cash and $25.8 billion in debt. To strengthen its balance sheet, Ford tapped a $10.1 billion credit line, which will help it buy another two quarters’ of time or so.

Ford did make progress on its turnaround plan, cutting costs by $4.4 billion in 2008. It also scheduled steep production cuts and laid off 1,200 at its finance arm. Those reforms make Ford optimistic - at least publicly - about avoiding a bailout.

The company said in its release:

Based on current planning assumptions, Ford has sufficient automotive liquidity to fund its business plan and product investments and does not need a bridge loan from the U.S. government.

But “planning assumptions” have changed almost daily over the past year, and they could easily change again, giving Ford an out if it seeks government loans. Some analysts have trouble seeing much of an alternative. “Although it appears to be making extreme efforts not to use federal funding, we are concerned about Ford’s financial condition,” Standard & Poor’s said in a research note. If Ford doesn’t quickly arrest its cash burn rate, the new credit line could be tapped out by summer, with little cushion left. At that point, Mulally may be headed back to Washington, this time, with palms open.

Disclosure: no positions

Comments

[IXLR8]

Ford reduced production (thus revenues) significantly in the 4th quarter and now has the lowest day's supply of vehicles in the industry. This reduction is what causes the "cash burn" to increase. Going forward, the "cash burn" will be significantly reduced and Ford's numbers will be much better in 09 than in 08.

2009 Jan 30 06:43 AM

[Free2Speak]

This analysis misses several factors...

1) The 4Q burn rate included costs of workforce reductions, etc. Those will not exist going forward. Therefore, the burn rate will be substantially lower.

2) Historical data shows that "pent up demand" for autos always results in a solid rebound once we begin to come out of recession. That will likely happen in 3rd quarter. Therefore, IMHO current assumptions of 10M cars sold this year is low. The number will likely be more like 13M--still low, but much better than projected.

3) The small cars, including the hybrid Fusion, are just what the buyers want. Ford's quality, by any measure, has improved--third party analysis. This has resulted in Ford's increasing market share for three quarters. All this points to better sales for Ford in the future.

4) The fact that Ford has not taken bailout money like GM & Chrysler plays well with the taxpayer [car buyer]. This will also likely increase Ford's market share.

All things considered, I believe Ford is positioned to be a positive surprise over the next year. I am so confident of this, that I have personally added it to my portfolio in a substantial way.

2009 Jan 30 07:00 AM

[mouth]

There may be some high ground in not taking the bail out money, but there is an old saying, "When they pass the hor'd oeorves take one. In fact take two because they may not be coming back"

2009 Jan 30 10:30 AM

[qw]

Ford is wise to not take Fed loans. These are loans not a bailout, but still come with government (read incompetant congress/senate) interference. I predict that when GM and Chrysler will have to go back in March to report on their progress to access more loans, the companies will have to make some ridiculous compromises to satisfy Congress.
Ford's pipeline of new products and their new quality equivalence to the imports will serve them well when the market comes back.

2009 Jan 30 03:30 PM

[User 363616]

Ford passed on Federal loans, however looks like they will be a big recipient of the Stimulus money. “Shovel ready projects” go to a construction site and count the number of F-series trucks. Not taking the cash from the feds gives ford a huge public relations edge and I’m sure before too long they will tout that in sales commercials. This could in the end play out huge for the Ford motor company.

2009 Feb 24 04:00 PM