While analysts and investors remain gloomy about the prospects for Ford this year, I remain ebullient and frankly downright excited to add at these prices. Ford demonstrated in the first quarter that they will be profitable in difficult environments, continue to build a rock solid balance sheet, generate strong cash flows, have demand that currently outstrips supply in North America and continue to execute the Ford One Plan which will effect strong global growth over the next few years.
Ford (NYSE:F) improved its balance sheet by $1.6 billion in the first quarter. On an annual basis that would be roughly a 40% return on equity, not too shabby. If you look at cash flows, you see a negative balance, but the cash essentially ended up in marketable securities: treasuries, government sponsored securities, and corporate debt securities. So they are actually moving cash into investments.
Ford's debt actually rose by $600mm in the quarter, virtually all of this being government sponsored debt at treasury rates, a program that the Department of Energy sponsors to promote energy-efficient technology developments. If you are not a bank, you can still take advantage of generational low rates.
Ford has about $5B in unsecured notes outstanding in the automotive division. No debt is due until 2018, and is staggered until 2047. The majority of the remaining automotive division debt is composed of the DOE low-rate variety. It has been decades since they have been in a position where they have tremendous control of their balance sheet; they currently have access to over $30B in liquidity. Fitch upgraded Ford to investment grade last month, and when one of the next two rating agencies finally gets around to upgrading Ford, their transformation will be complete.
The finance division is essentially a bank, which borrows to lend to retail and business customers, and is secured by receivable payments or leased assets. The finance division is expected to generate $1.5B in lending profits in 2012. Ford has indicated that they actually plan to increase the leverage from 8-1 to 13-1 over the next few years, which will obviously generate additional lease and lending income.
So the next few years is when Ford is going to enjoy the fruits of their hard work. They are releasing new award-winning models later this year over multiple continents, investing massively in Chinese manufacturing platforms, and are done retiring debt, freeing up a lot more cash that used to be paid out in interest. Their manufacturing platforms/supply chain goals in the Ford One Plan are being achieved to the point that they earn 60% more per vehicle sold in the U.S. than GM. The future is very, very bright for Ford.
This is a Buffett special. Understandable business, excellent management, competitive advantage (eco-boost technology), and a reasonable price. Ford will be generating a lot of cash for years to come.
"We can't run the business based on what the market does," said Ford's Brown. "If we continue to deliver the performance, the market will respond. So we're just going to keep our heads down and continue to deliver."
Disclosure: I am long F.