Why Ford's Debt Shouldn't Stop You From Buying Ford Stock

| About: Ford Motor (F)

I am writing this partly in response to this SA article, and partly because I think this issue seems to be misunderstood.

Ford (NYSE:F) has a total of $98BB of debt, the first time they’ve been under $100B since 2000, but why do they have so much debt? Unlike General Motors (NYSE:GM), Ford has a very profitable and large lending arm, called Ford Motor Credit Co. They basically help customers buy their cars by lending them money to do so. Virtually all big automakers have one of these money making machines, except for GM of course.

Remember GMAC? They sold it off and now own about 10% of GMAC (or now Ally as it is called). They did create their own lending arm, called GM Financial. It has assets of about $12B, and quarterly sales of $330M, compared to Ford Credit assets of $102B and quarterly sales of $2B. All of those numbers are from Q2 2011. Remember, to run these lending arms, you need money to lend out, and that comes in the form of debt and leverage.

To show these debt numbers aren’t too crazy, I'll give you an example of Toyota (NYSE:TM) and Honda (NYSE:HMC) and their debt situation. Toyota has $110B in debt and Honda has $53B in debt. Unfortunately, they only have a consolidated number on the annual report, so I can't figure out how much is attributable to their lending arm and car side.

There is another aspect of the balance sheet that needs more attention: pension plans. At the end of 2010, Ford had $18.4B in unfunded pension and benefit liabilities, while GM has $31B in unfunded pension and benefit liabilities. This is more indicative of better management than anything, and will hurt GM in the long run.

As of Q2 2011, Ford's debt is made up of $14B of automotive debt, and $84B of financial debt. They paid off $2.6B during Q2, and now have gross auto cash of $8B. Compare this to last year, where their cash was the same, but their auto debt was up to $26.2B. That is a total debt reduction of over $12B in one year. Because of this, their interest expense has been reduced dramatically. In an annualized basis, their interest expense has dropped $2B from Q2 2010 to Q2 2011. That is pure, bottom line savings an one reason Ford’s half-year operating margin was 6.9%. GM’s was 5%.

My whole point is their debt is easily sustainable. Companies issue debt to use the money effectively, and Ford did that extraordinarily well. They mortgaged everything in 2006 to have capital to go through their restructuring plans, and coincidently they had enough cash on hand to stay liquid enough once the credit markets froze up and GM and Chrysler went bankrupt. Plus, 84B of that debt is there because of their lending arm, so that debt is also being put to use, just like the debt at Toyota, Honda, and Volkswagen (OTCPK:VLKAY).

Investors should also consider that Ford’s credit rating has been on the rise for the last couple years, and is close to receiving the coveted investment grade rating. With or without a credit rating boost, Ford can retire and reissue with more favorable interest rates in this amazing environment, cutting their interest expense even more. An investment grade boost would magnify that even more.

Ford's debt does still matter, and everything needs to be considered when buying a stock. However, when you're able to shift focus past Ford's debt, this company looks very strong.

Disclosure: I am long F.