Auto Bailout

Ford: Smaller-Than-Expected Loss Boosts the Stock


Ford Motor (F) said on Apr. 24 that it firmly believes it has enough cash to get through this year without any government loans. It posted a smaller-than-expected first-quarter loss of $1.4 billion, a performance that sent the automaker's shares up more than 17% in early trading. Ford closed up 0.51, or 11%, at 4.97, with six times its average trading volume.

Deep cost-cutting in Ford's engineering and product development as well as debt reduction and deals with the United Auto Workers that will lower costs in the future moved Wall Street investment bank Goldman Sachs (GS) to issue a "buy" recommendation on Ford stock before trading opened on the New York Stock Exchange.

Gaining Market Share

Ford shares have been on a tear since the start of the year, rising more than 70% through the close of trading on Apr. 23. Data collected by Edmunds.com shows a spike since last fall in General Motors (GM) and Chrysler shoppers now considering Fords, especially to the F-Series truck and Fusion sedan models.

"Our results in the first quarter reflected the extremely difficult business environment and weak demand for autos around the world," said Ford President and CEO Alan Mulally. "Despite the challenges, Ford made strong progress on our transformation plan by gaining share with strong new products, slowing operating-related cash outflows, reducing outstanding debt, lowering our structural costs, and reaching new agreements with the UAW."

The automaker posted a $70 million profit in the same quarter the previous year, well before the stock and credit markets began their deep slide.

Perhaps most important to Ford's financial health is its shoring up of cash reserves, which stood at $21.3 billion at the end of the first quarter. By contrast, GM and Chrysler are essentially out of cash reserves, which is why they need government loans or a Chapter 11 bankruptcy reorganization to survive.

Ford Chief Financial Officer Lewis Booth said the company's $3.7 billion cash burn for the quarter will be the highest for the company this year. But he expects the rate of cash depletion to slow throughout the rest of the year. The automaker is projecting to cut its expenses by $4 billion this year to offset lower vehicle sales and revenue.

"Ford, in part, is benefitting from their rivals' bad news," says independent marketing consultant Dennis Keene. "Every time a new story comes out, on a daily basis, about GM and Chrysler going down, Ford gets a mention as a stronger company that hasn't taken any taxpayer loans."

Reaching Break-Even

Ford, while unquestionably stronger than its crosstown rivals, still faces stiff challenges to achieve its goal of operating at break-even by 2011.

Its sales were off 44% through March, while total industry sales were down 38%. Ford's revenues fell to $10.2 billion in the first quarter from $17.1 billion the year before. That is a breathtaking drop for any company, but is especially hard on an auto company, with its high fixed costs.

The possible bankruptcies of GM and Chrysler are also threatening the operations of hundreds of auto suppliers. Disruptions from suppliers to Ford could cause chaos in its production. CEO Mulally said he is confident that the White House auto industry task force is on top of the supplier issue and will act to provide credit and liquidity to those companies.

Ford cut $1.9 billion in costs in the first quarter, almost half its goal for the full year. Besides head count, Ford has been rapidly reducing the amount it spends developing vehicles, though its quality has been rising against rivals such as Toyota and Honda. Higher-quality scores recognized by outside observers like Consumer Reports are helping bump up retail demand for Ford, Lincoln, and Mercury vehicles.

Ford also has the strongest flow of new products among the U.S. carmakers over the next two years, having focused its resources on pumping up the lineups of its core Ford and Lincoln brands.

Detroit Downturn's Winner

"We continue to see Ford as a net beneficiary of the significant structural shifts in the industry, and the stronger operating performance give us greater confidence the company can navigate through the industry trough," says Goldman Sachs auto analyst Patrick Archambault.

Ford's losses were spread across the globe; the U.S. is far from the only economy in trouble. It lost $637 million in North America and $550 million in Europe. Ford earned $63 million in South America and $96 million in the Asia-Pacific region.

Ford's Volvo unit posted a pretax loss of $255 million. The carmaker is attempting to sell the Swedish company, having already sold off Land Rover, Jaguar, and Aston Martin to focus on Ford, Lincoln, and Mercury. Chinese automakers and European private equity firms are the most likely buyers.

Kiley is a senior correspondent in BusinessWeek's Detroit bureau.

David Kiley is a freelance writer based in Ann Arbor, Mich.

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