Ford's Deepening Hole

Ford (F) delivered an awful quarter with 8.7 billion dollars of losses, the worst showing in its history. What was most troubling for Ford was their $2.1 billion write-down in their credit division due to losses on lease resales at auction. As discussed in my previous article here (Ford's Financial Service Business About to Enter the Red), Ford has been surviving (barely) these past 7 years on income derived from their financial services. From 2001 through 2007, Ford made $21 billion from their financial arm but still went on to lose a cumulative $18 billion! That was their last support. Without the profitability of that division, Ford is in free fall. The credit markets are making it harder to borrow, the value of vehicles that come off of lease is falling, and the division's debt is sky high at $142 billion.

As Ford continues to burn cash in write-offs and retooling itself, it continues to pile up debt. Their conference call indicated that their automotive division would be increasing its debt from $26 billion to $32 billion. Its decimated financial services division struggles under the yoke of $142 billion in debt. Currently Ford has arguably the worst debt/share and revenue/debt position of any other car company (see Ford and GM Living on Borrowed Time).

Ford's debt works out to $75 a share as of last quarter. When you buy a share of Ford, you are becoming an owner of the company. That means that for every share of Ford you purchase, you are taking on $75 of debt (when their SEC documents for Q2 come out, I predict debt will actually be far worse). Compare that to Tata Motor (TTM) at $2 a share or Fiat (FIATY.PK) at $8. Their revenue is falling quickly. Their revenue/debt ratio used to be 1 (unfortunately one cannot calculate earnings/debt anymore, because they have no earnings); that number will sag further as their sales figures continue to plummet.

The problem is, how do they dig themselves out of the whopping debt they've accrued? Ford has certainly tried. It tried to cut its labor costs only to find customers were not buying its SUVs and trucks. Its financial arm attempted to leverage its way to profit only to get killed along the way because of the cratering value of its resale inventory.

Can they exit their leasing division like Chrysler? Sure but that will entail more write-offs. There is only so much cash on hand. Now they are trying to reconfigure their plants to produce smaller cars, a process that will take time and money, both of which are in short supply. So what will be the next misadventure for Ford? Look toward a further collapse in its financial services division with worsening auction sales and distibutor bankruptcies (think Chrysler's stopping its leasing division), dizzying commodity cost (steel and copper - we'll hear about those in the next few quarters), and the coming downturn in Europe (one of the geographic areas where Ford has done well).

Can they ever pay down their debt? It seems the hole just keeps getting deeper.

Disclosure: Short F

Comments

[charles]

Dont knock em, they are no diff then the US gov. when it comes to debt. lol

2008 Jul 27 04:56 PM

[Scott Backus]

Good analysis.

I've held a short position with F in the past and covered for a small profit.

Even though the numbers look bad, this company, and the other auto companies as well, will thrash around for years and years. With all the debt they carry, none of the bondholders want to see them go under.

2008 Jul 27 05:23 PM

[bbzz24]

levered 25 times and yet no profit. that looks like a rock solid bailout.

2008 Jul 27 06:23 PM

[Ames Tiedeman]

How can it take 4 years for Ford to get 6 small cars it already sells in Europe, selling in America. This is as long as it took to win WWII? This is simply not acceptable.

2008 Jul 27 07:41 PM

[Ames Tiedeman]

And never forget how the mighty Mr. Kaiser built the Liberty Ships in a matter of hours!

WAKE UP FORD!!!! Good Grief!

2008 Jul 27 07:41 PM

[ggillin]

Ford, GM and Chrysler have been in collusion with the US govt to keep the hydrocarbon tax structure alive and kicking for to long. All of the foreign competitors have never been bound to this policy in the worlds biggest market and so they have been eating F, G, an C's lunch (sales) for forty plus years and now the chickens have come home to roost. The govt long ago abandoned the big three when it became impossible to drill for oil, build a pipeline, refinery, gas storage facility, wind or tidal turbines, nuclear
reactor or anything else needed for energy production. Not in my backyard is the hue and cry of America today. The General got it right when he said that we are a bunch of whiners and may I add spoiled brat, gutless cry babies. I'm not the general and I do not have to be politically correct and condescending. All of you who oppose anything and everything stand up and take a bow because you are Americas biggest problem, you and the gutless pols who are your allies. Look what we have got from you, nothing and thats all we will ever get from you is nothing. Chrysler is dead, their future is nil, they are out of money and they will not be getting anymore. Every Chrysler product ever made is destined to be catching a sun tan in the nations auto junk yards except for a few saved by collectors. No one with even a modicum of a brain wants to keep more brands in an auto manufacturing market that is already over crowded and destined to become even more so. Ford, welcome to bankruptcy, most bond holders, all preferred holders and common stock holders, stick a fork in your butt, your done, kiss your investments good by. Everybody in the know has already bailed out if they could have, only speculative money is out there now and that's soon to vanish. Ford will survive because of old line American money and a govt bailout but the price is going to be high, very, very, high and the Ford family and Foundation will no longer own a controlling stake in anything. This American dynasty is coming to an end. Sad to say, because this writer has always been a 'Ford man'. The 1956 Ford Fairlane 500, (my all time favorite car) and all of those big beautiful Lincoln's that I loved and drove for so long (over 30+ years) are gone until the govt can force the hydrocarbon fuel tax structure into the fuel cell mix. What this means is that 'you' can not make your own fuel, a fairly simple thing to do. GM, you gutless coward, you deserve everything that is happening to you. You are the dumbest corporation in modern day history with a management team that can claim the all time DIMWITS title, uncontested throughout the world, GM, you win hands down, no one is even close. You refuse to build a quality small car and you have refused to build an electric car for years even while the govt was selling you out. You have destroyed billions of investors dollars and the lives of millions of workers. You do not deserve to survive but you will. The same is true for GM investors as for Fords, kiss your money good by if your dumb enough to stick around for this fiasco with this dimwit management. Do you think GM is safe in China, South America or Russia? who are you kidding, the Chinese do not need GM, in ten years you will not be able to find GM in China even if you look under every brick in the GREAT WALL , every auto company in the world can eat GM's lunch and these other country's/nations will be no exception. GM, bend over, the boot in your butt is coming in a big way. Someday a miracle of miracles will happen and GM will build a car that the American public actually wants and the cycle will begin again but for us middle aged investors, we will never live to see it, even with ten more modern miracles of medicine. Did anyone see “Who killed the electric car?” why it was GM, Ford and the US Govt. Why? Because of the 'hydrocarbon fuel tax structure' no other reason, certainly not all of the govt and manufacturer's poo that they have tried to bury us with all of these years. Today the hybrid is a reality, tomorrow (2010, if not sooner) the all electric car will arrive on America's roads. (the worlds roads, in reality) Get ready, a MASSIVE TAX OVER HAUL around the world is on the way and it is not going to be a pretty picture. The socialized country's are going to see the huge hand of govt on their paychecks (and I mean HUGE) and American's are going to see a 25 percent plus bite minimum for everybody. GM, Ford survive, Chrysler get your suntan lotion ready, your gonna need it.

2008 Jul 27 09:09 PM

[Paul Killinger]

Wow, what a wonderful rant, thank you!

The only thing I might add is the TOTAL average tax bite exceeds 25% ALREADY. And we're headed toward 50% as we speak at a 100 mph. God help us all!

2008 Jul 28 01:05 PM

[bill d]

GM DID build 50 electric cars - had them on the road, then called them back and DESTROYED THEM. Wouldn't even allow the testers to buy them.
Wasn't the top guy at Ford that said in the recent past he was surprised Americans were interested in small cars ????
They are ALL a bunch of morons but they are making a shitload of money more than you or I.

2008 Jul 28 09:07 PM

[Calvin C.]

McCain says he'd bail F & GM out. Yes, they are symbolic of America's great yesterdays, but that alone is what they will always be.

2008 Jul 28 10:25 PM

[User 220318]

I cannot imagine two of the largest companies in the WORLD are into this mess. Too little too late sums it up however if they get with it and build what the buying public requires they might have a chance. Also thanks to the politicians for allowing the imports to totally kill the american market with no import duties and unfair trade etc. Is anything at all made here anymore? Enough Said!!!

2008 Jul 29 11:07 AM

[Metzenbaum Scissors]

Imagine the DJ30 with F or GM. These firms are becoming increasingly irrelevant.

2008 Jul 31 08:18 AM