Optimistic About Ford

Ford Motor Co. (F) (Analyst Report), the only member of the Detroit Three that evaded bankruptcy, recently announced that it would enhance its production level by 16% y-o-y to 485,000 vehicles for the third quarter of this year.

The raise comes on top of a planned 10% increase to 460,000 units announced last month. Ford will manufacture an additional 15,000 cars and 10,000 trucks compared to its previous production schedule. It will focus on cars such as Mustang and Focus as well as on pickup trucks.

Ford’s move is mainly driven by strong sales results expected in June. According to the Ford U.S. sales analyst George Pipas, North American vehicle sales during the month could decline by 25%–30%. This will then be the least sales decline that the industry has witnessed since September 2008.

According to Pipas, Ford’s sales could even decline by 10%–20% during the month and if it does, it would be the lowest since July 2008. In the first five months of 2009, the company posted a monthly average sales decline of 37.4%. Pipas assured a revival of consumer confidence and stated that the worst is over for both auto sales and the economy.

Considering the overall outlook for the company, Ford’s decision to raise production appears to be in line with the previous positive remark about its financial position. In mid-June, Ford’s CEO, Allan Mullaly, commented that the company has a sound balance sheet and is progressing towards further reduction in debt. The company is also continuing talks with UAW on ways to boost its cost effectiveness, including issues such as no-strike provision that had been rejected by the Ford workers in 2008.

Overall, in line with its business viability plan presented in December last year, Ford still anticipates returning to profitability and generating positive cash flow in 2011. Unlike its peers, General Motors (GMGMQ.PK) (Analyst Report) and Chrysler, Ford has survived bankruptcy due to its $23.5 billion liquidity raised in 2006.

However, the company does not stand in a better position compared to General Motors and Chrysler in their post-bankruptcy situation. At the end of the first quarter of 2009, Ford had about $32 billion in debt. In contrast, Chrysler left bankruptcy with about $11 billion in debt and GM will be left with about $17 billion in debt after the bankruptcy process. This is because Ford’s cash reserves were built not through profits but by mortgaging most of its assets.

Hence, we reserve our opinion to recommend Ford as Hold with a target price of $6.50.

Comments

[Mad Hedge F...:]

Yes, but will they be able to beat BYD? Like Paul Revere on his midnight ride, I feel a patriotic duty towarn you of the foreign invasion that is headed our way. No I’m nottalking about the British, but redcoats of a more Eastern origin. I’mreferring to the Chinese electric car company “Build Your Dreams” (BYD)(see www.byd.com/company.php). CEO Wang Chuan-Fu, who Charlie Munger describes as a combination ofGeneral Electric’s (GE) legendary manager, Jack Welch, and inventorThomas Edison, scraped up $300,000 from relatives to start a knock off cell phone battery company in Shenzen in 1995. He grew the company into a massive, vertically integrated conglomerate, employing 130,000workaholics at 11 factories, including those in Hungary, Romania, andIndia (interesting choices). BYD bought a defunct car company in 2003and re-engineered it to launch the $22,000 F3DM sedan last year, an old technology ferrous oxide based plug-in hybrid that gets 62 miles on a charge. General Motors (GMX) Volt and Toyota’s (TM) plug in Prius,which won’t come out until next year, will only get 40 miles per chargeand cost more. All-electric models are coming out this year. WarrenBuffet was so impressed, he made a rare foreign investment last year,asking for a 25% stake and settling for 10% for $230 million. Wang, who has already earned himself a place on the Forbes 400 list, intends to build BYD into the world’s largest automaker, and quickly. Why do Ifeel like this war is over before the first shots were even fired?

Jun 30 01:45 PM

[elcopone:]

Mad, most of the time I enjoy your comments, but this time I think you're a bit off. There is good reason why Toyota and GM will be slower to market and less fuel effiicient with their electric models. Two words for you... safety and reliability. If you take Hyundai as a history lesson you learn that they came to the US with unsafe and unreliable cars. As a result they have been spending the last 20 years trying to prove that their cars are safe and reliable. Despite independent proof their cars are indeed safer and more reliable then virtually everyone, they have yet to shed that image.

So before you start crowning some Chinese company as the next big thing, understand that they have yet to prove they have either safety standards that are required or the reliability that is demanded. Many smart companies have gone belly up trying overcome these two major hurtles before. Additionally, Toyota has not launched these products not because they have inferior technology, but because they understand that all it takes is one battery exploding to ruin a 50 year reputation. Besides, there are about 200-300 auto companies in China already competing on the same value proposition.

I'm just saying, lots of question marks there, and I'm not ready to anoint them just yet.


On Jun 30 01:45 PM Mad Hedge Fund Trader wrote:

> Yes, but will they be able to beat BYD? Like Paul Revere on his midnight
> ride, I feel a patriotic duty towarn you of the foreign invasion
> that is headed our way. No I’m nottalking about the British, but
> redcoats of a more Eastern origin. I’mreferring to the Chinese electric
> car company “Build Your Dreams” (seekingalpha.com/symbo...
> www.byd.com/company.php). CEO Wang Chuan-Fu, who Charlie Munger
> describes as a combination ofGeneral Electric’s (seekingalpha.com/symbo...)
> legendary manager, Jack Welch, and inventorThomas Edison, scraped
> up $300,000 from relatives to start a knock off cell phone battery
> company in Shenzen in 1995. He grew the company into a massive, vertically
> integrated conglomerate, employing 130,000workaholics at 11 factories,
> including those in Hungary, Romania, andIndia (interesting choices).
> BYD bought a defunct car company in 2003and re-engineered it to launch
> the $22,000 F3DM sedan last year, an old technology ferrous oxide
> based plug-in hybrid that gets 62 miles on a charge. General Motors
> (seekingalpha.com/symbo...) Volt and Toyota’s (seekingalpha.com/symbo...)
> plug in Prius,which won’t come out until next year, will only get
> 40 miles per chargeand cost more. All-electric models are coming
> out this year. WarrenBuffet was so impressed, he made a rare foreign
> investment last year,asking for a 25% stake and settling for 10%
> for $230 million. Wang, who has already earned himself a place on
> the Forbes 400 list, intends to build BYD into the world’s largest
> automaker, and quickly. Why do Ifeel like this war is over before
> the first shots were even fired?

Jun 30 04:08 PM

[smfranke:]

"Pipas assured a revival of consumer confidence and stated that the worst is over for both auto sales and the economy."

The confidence part of that statement doesn't jibe with what came out today.

He should be correct on the June sales numbers though. (How hard is it to get your dealers to report sales to you?)

I'm assuming that most people who have jobs already have cars. In this economy I don't think people will be buying new cars unless really needed. Fear of job loss should put a damper on purchases.

Unemployed people probably can't buy cars even if they want to.

I really don't think it's in Ford's best interests to be increasing production just yet. I'm not an auto industry professional, so what do I know?

(disclosure... I drive a 2008 Taurus but I like Japanese cars better.)

Jun 30 10:50 PM

[Jobu37:]

You ask but "what do I know?" The short answer is "not very much".

Ford was carrying around 40 days worth of inventory at the end of May. There are already shortages of Expeditions, Fusions and Mustangs. Once the "Cash for Clunkers" stimulus kicks in the Focus inventories will tighten up as well. Ford is just being proactive in a good way not unlike their proactive approach to working inventories down that got them to the enviable position they are in now. If they didn't increase production to get closer to the preferred 60 days of inventory they wouldn't have anything to sell. The increase in production also includes higher prodcution for the rollout of the all new Taurus which should improve on the sales rate the current version has.


On Jun 30 10:50 PM smfranke wrote:

> "Pipas assured a revival of consumer confidence and stated that the
> worst is over for both auto sales and the economy."
>
> The confidence part of that statement doesn't jibe with what came
> out today.
>
> He should be correct on the June sales numbers though. (How hard
> is it to get your dealers to report sales to you?)
>
> I'm assuming that most people who have jobs already have cars. In
> this economy I don't think people will be buying new cars unless
> really needed. Fear of job loss should put a damper on purchases.
>
>
> Unemployed people probably can't buy cars even if they want to.<br/>
>
> I really don't think it's in Ford's best interests to be increasing
> production just yet. I'm not an auto industry professional, so what
> do I know?
>
> (disclosure... I drive a 2008 Taurus but I like Japanese cars better.)

Jul 01 07:38 AM

[a. palmer jr.:]

If we don't want the Chinese to take over our auto markets like they've taken over all other manufacturing, there's an easy way to avoid this scenario---JUST DON'T BUY THEIR CARS. It's as simple as that. I know that it is going to be tempting, they will have the cars cheaper than anyone else, quality may not be quite as good as some of the others, but they will get great gas mileage and the price will be right. Like I said, it will be tempting.

Jul 01 11:57 PM