GM, Ford Confuse Investors With The Turnaround Dance

The turnaround at Ford Motor Co. (F) and General Motors Corp. (GM) is like one of those line dances guests do at weddings, Gimme Credit analyst Shelly Lombard writes in a research note released Tuesday.

“Two steps forward, one step back, then slide to the side.”

For investors, it can all be a bit confusing. On the upside, the United Auto Workers union seems more amenable to concessions than it has been in the past and has stated publicly that Ford’s situation is dire enough that without help, it could end up bankrupt.

Good news for the stocks, right? Sure. Then came June’s weak U.S. sales numbers to ruin the party. GM fell 24% over June 2006 and Ford fell 9%. True, both companies are deliberately scaling back sales to rental fleets.

But GM noted that Toyota (TM) is getting more aggressive on discounting its vehicles. And that doesn’t bode well. GM says it is on track to meet its sales goals, but its run-rate sales are below its 3 million target for the year.

Competitive pressure, housing and gas prices could make the rest of the year look like June did, Ms. Lombard says.

Both companies are aiming to shore up their finances. GM announced it is selling Allison Transmission for US$5.6 billion. Ford wants to convert its 6.5% preferred stock to common stock, which would get rid of a US$5 billion liability, capture a US$1 billion discount, and save the US$325 million dividend.

Ms. Lombard argues Ford shareholders to hold off on converting. She argues that even if there’s future upside, they’re giving up their dividend and priority in the event Ford is forced into bankruptcy protection.

She concludes:

UAW talks and near-term results could cause the securities to underperform, but we’d buy Ford 2031 bonds in the mid to high 70s, GM 2033 bonds in the mid-80s.

Comments

[gratianus:]

For the life of me, I can't understand why anyone would take the Ford coversion offer, since the premium you receive over the conversion rate stipulated in the convertibles is $14.25 in Ford common, and for that "premium" you forfeit the $3.25 annual distribution, which works out to 22.8% on the "premium." Can someone explain to me why Ford thinks anyone would jump at this opportunity.

2007 Jul 11 01:56 PM

[oldie383:]

Is there a followup mechanism here? Will you receive notice of my reply? At the time this occurred I simply sold my F-S holdings. What Ford's strategy is, can only be guessed at by you and me. I think I am able to envision myself as an insider and so I would always have this security continue on as a great vehicle to carry my family and friends' money around. I have owned four similar securities in the past.


On Jul 11 01:56 PM gratianus wrote:

> For the life of me, I can't understand why anyone would take the
> Ford coversion offer, since the premium you receive over the conversion
> rate stipulated in the convertibles is $14.25 in Ford common, and
> for that "premium" you forfeit the $3.25 annual distribution, which
> works out to 22.8% on the "premium." Can someone explain to me why
> Ford thinks anyone would jump at this opportunity.

Apr 21 12:15 PM