Ford (F) celebrated a landmark turnaround in its business operations a few days ago when Moody's Investors Service announced a credit upgrade that was the final seal of approval on a turnaround strategy that began in 2008 when the company was in deep trouble and up to its ears in debt. One of the most significant consequences of the upgrade was that control of the iconic Blue Logo passed back to the company.
Among other assets, the logo had been pledged as collateral for borrowing. Moody's upgraded the credit rating on the automotive operations to Baa3 and Ford Motor Credit, the finance arm, now also has a rating of Baa3. Moody's said that the upgrade reflects the strength of the company's position in North America and its financial position and its expectation that the company will continue to follow the business practices that will help it to keep its investment-grade rating despite the cyclical nature of the business and the problems in Europe.
At the end of the year 2006, Ford had to borrow $23.5 billion against a collection of almost all its domestic assets including the trademarks Blue Oval as well as the F-150 pickup truck and Mustang sports car. The lenders stipulated that the company needed two different rating companies to upgrade ratings in order to retain control of the assets. Fitch Ratings upgraded the company last month and the Moody's upgrade will help it to meet this condition. Ford used the borrowed money to completely restructure and streamline its global operations with the result that it was able to survive the drastic drop in auto sales in 2009 without resorting to the kind of bailout that its competitors General Motors and Chrysler needed.
For the first quarter of the current fiscal, the company showed an operating profit of $2.1 billion for North America, which was the highest profit in the region in a decade. The company has been consistently profitable for the last few years with the exception of Europe where every single automobile manufacturer is having problems. Overall, Ford made $1.4 billion in this quarter, which was down 45% from $2.6 billion on a year-on-year basis on sales that dropped by 2% to $32.5 billion.
Meanwhile,Standard & Poor's Ratings Services said that the first-quarter performance has had no impact on the ratings. The results have been dominated by the performance in North America where margins at almost 12% were ahead of expectations while most of the other regions were loss making. As a result, it is clear that the performance for 2012 will be driven by North American operations. Automotive operating cash flow in the quarter was $900 million higher than $700 million in the preceding quarter but down from $2.2 billion for the same quarter in the previous year. Ford is expected to generate $2 billion to $3 billion in operating cash flow every year for the next few years. Automotive cash balances have remained almost flat at a very substantial $23 billion.
In my opinion, Ford is looking very much better than it has looked for years and this is borne out by the ratings upgrades. It now has a good range of products and a solid position in the critical home market of North America. The turnaround that was created by CEO Alan Mulally and his management team looks like genius in hindsight but it was very far from being a certain thing when it was conceived in 2006. At that time, it was a major departure from conventional wisdom in Detroit and Mulally had to work hard to sell the plan internally as well as to the world at large. At the heart of the plan were the requirements that production capacity should just equal demand, every product should be profitable and the global operations should be run as a single integrated process. As a result of this plan, the company created a standard line of cars to be sold throughout the world with an investment in each product to create a category leader.
The plan has worked extremely well and the company has been able to generate increased revenue as well as solid operating profits for the last few quarters. Now that the survival of Ford is no longer a short-term issue, much remains to be done in the long term. It does seem as if Toyota (TM) and Honda (HMC) have been taken by surprise by the strong showing of Ford's new products and are already beginning to make their moves to catch up and protect their turf. Volkswagen (VLKAY.PK) has begun to implement its own plans to become the largest carmaker in the world by the year 2018. General Motors' efforts to transform itself also are beginning to show results. However, Europe continues to remain a problem for everyone. Ford is starting to bet big on China but the results have been spotty to say the least. Ford is continuing to focus on Asia and China to provide substantial new growth starting from next year.
Industry experts are of the opinion that North American car sales continue to look strong and Ford is holding its ground despite the fightback from the big Japanese manufacturers. Toyota is expected to make a strong showing but the trends in North America look good for Ford in its largest and most profitable market. Despite the Ford turnaround now being an established fact and the dividend yield at close to 2% being attractive if not the best, I would still wait before buying any new Ford stock. I would look for a stronger showing in markets outside North America and in particular China and Asia before making an investment decision. Meanwhile, you should continue to hold on to your existing Ford investment in the expectation of an upturn in stock prices in the future. I anticipate Ford will be a $20 stock by 2014.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.