Ford (F) is an investment grade credit again. Moody's Investors Service in May upgraded its ratings on the company by two notches to Baa3 from Ba2. Also, the company announced that it had entered an agreement with Microsoft (MSFT), which should boost the attractiveness of one of its electric cars. The rating agency also bumped up the ratings on Ford Motor Credit Co. by one notch to Baa3 from Ba1 and assigned stable outlooks to them both.
In 2006, Ford, General Motors (GM) and Chrysler, also called the Big Three, were experiencing one of the worst downturns in their histories. The recession and high gas costs led to fewer people buying their automobiles, especially the gas guzzlers that had become their most popular sellers. All of them faced bankruptcy, putting the federal government in the awkward position of searching for ways to bail them out.
To stave off bankruptcy, GM and Chrysler took the government up on the bailout offer. However, Ford did not. Instead, it chose to take out loans. It worked diligently to get its finances in order. At that time, it had experienced a serious drop in sales, which culminated with its stock dropping to a measly $1 per share. Even though its finances were in dire straits, Ford chose not to take the path of other automakers, which at the time seemed foolish to some. We see now that it was the right decision.
Ford raised $23.5 billion in liquidity, consisting of $18.5 billion of senior secured debt and credit facilities. This was secured by substantially all of its domestic assets, including its beloved Ford Blue Oval, its F-150 and Mustang trademarks, and $5 billion of unsecured convertible debt.
Since then, the company has taken several steps to get its financial house in order. Its first step was working out a labor agreement with the UAW. The new agreement has a lower wage structure for new employees and flexible work rules. This occurred in the spring of 2009, and by the fall, the company's financial situation had improved to the point that it was able to record its first quarterly pre-tax operating profit since the first quarter of 2008. In fact, that year it had a net income of $2.7 billion, which was an improvement of $17.5 billion from the losses of 2008.
Things continued to go well for Ford through 2011, which marked the third year in a row of improved annual operating profits. Also, Ford managed to reduce its debt by more than $20 billion compared with year-end 2009.
All of the measures that Ford took enabled it to pay back that $23.5 billion loan in September of last year, which is impressive. Alas, it also got its Ford Blue Oval back. By taking out the loan and paying it back in full, Ford made history. It is the only one of the Big Three that managed to turn its financial situation around without the government bailout money. Another sign indicating that the automaker has gotten its finances in order came in March of this year when it announced it will pay a dividend for the first time in almost six years.
In upgrading Ford, Moody's said a key factor was whether or not the company would be able to sustain its strong performance. It concluded that the improvements Ford has made are likely to be lasting. I believe Ford "gets it," and it said as much in its statement responding to the rating upgrade. I think investors can take comfort in knowing that company plans to continue to focus on driving profitable growth for its stakeholders. This will help it maintain strong investment grade ratings, regardless of fluctuations in the economy.
Of the Big Three, Ford is the only one that pays a dividend. It is $.20, yielding 2%. They are all in a better position than they were in 2008. In fact, the automobile sector is poised to experience a jump in sales for May. More specifically, Edmonds expects light vehicle sales to continue at a healthy clip in May, with roughly 1.3 million new cars being sold by the end of May. That would result in an estimated seasonally adjusted annual rate of 14.4 million. This would be a 17.5% increase from April 2012 and a 31.1% increase from May 2011.
To get a better idea of how sales are going in the auto industry, consider these stats from Edmonds:
Ford is forecast to sale 222,712 vehicles in May, which is 24% more than it sold last May. GM is forecast to sell 246,321 vehicles, which is 11.4% more than it sold last May. Chrysler is forecast to sell to lowest number of vehicles of the Big Three - 164,083. However that represents a whopping 42.2% increase over May 2011.
Just as there are many people shopping for new cars right now, there are just as many who have poor credit and cannot qualify for traditional financing. Automakers will have to remain cautious and avoid doling out subprime loans to move their inventories. This will hamper any attempts they may make, because these buyers are extremely risky.
The partnership Ford has forged with Microsoft should work wonders in combining the software of Microsoft with Ford's innovative electric vehicles. The two companies are attending a technology conference to demonstrate how the new 2012 Focus Electric's technologies can help address future global transportation challenges.
While things have improved for Ford, it still faces certain challenges. They include those stemming from its high exposure to the depressed European auto market and the company's modest position in Asia -- particularly China. About 25% of Ford's global revenues come from Europe. The losses could range from $500 million to $600 million in 2012.
Ford must also contend with Toyota (TM), which is the number one carmaker in the world in terms of revenue. Although the Japan-based company's production suffered after the 2011 tsunami, it appears the company is poised for a major comeback. It is rolling out eight new models this year for emerging markets that include Brazil, India, Indonesia and Thailand. Then there is Volkswagen (OTCQX:VLKAY). It is predicting that its revenues this year will exceed those of 2011. It is also rolling out new models this year.
Still, I consider Ford to be a long-term buy. Currently trading at around $10, I see it continuing to rise to around $15 by 2014.