Ford's (F) stock has fallen significantly over the past several months. However, it does not properly reflect the fundamentals of the company. The stock has taken a hit mainly due to the general market downturn and rumors of a possible slowdown in automobile manufacturing.
This week Ford was upgraded by Moody's to investment grade. This comes after Fitch also raised Ford's credit ratings as well. A few years ago Ford was in major trouble and had to leverage many of its assets including its famous blue logo in order to secure a loan.
Moody's now believes that Ford balance sheet is strong and shows that the company has reduced leverage efficiently. Ford will also be able to access additional lines of credit for expansion and improvement of its existing facilities.
Moody's boosted Ford's senior unsecured ratings two levels to Baa3 from Ba2 and raised its finance arm, Ford Motor Credit, to Baa3 from Ba1. Moody's followed Fitch Ratings in assigning an investment-grade status. With two such ratings, Ford regains control of the logo and other assets pledged as collateral to obtain a $23.4 billion loan to keep the business going in 2006.
As a Ford shareholder I am happy to see the company get back to investment grade, not because its symbolic, but because their cost of capital will diminish significantly.
For example, investment grade debt can typically carry an interest rate around 4%. This is about half that of junk bonds which are around 7%. Ford will be able to lower their interest payments in the future. This will translate into increased earnings.
"The upgrade of Ford recognizes the strength of the company's position in North America, its robust liquidity position, and our expectation that the company will continue to embrace sound operating and financial disciplines. We believe that these strengths will enable Ford to maintain an investment-grade profile in the face of the sector's ongoing cyclicality and weakness in the European market."
- Moody's Investor Services
While Ford is doing well, it is not the only company. GM (GM) is set to hit investment grade status within the next 12 months as well. Moody's stated GM's rating is at Ba1, which is right below investment grade. Moody's said there is a positive outlook for GM as well, which means investment grade may be right around the corner.
Ford's recent stock price does not reflect the company's fundamentals. This recent development will allow Ford to access capital more easily as well as locking in a cheaper interest rate.
Disclosure: I am long F.
