Ford's Turnaround on Track, but Not Complete

With a resurgent stock price and surprisingly strong second quarter results, Ford is gaining on its rivals

Ford Motor Chief Executive Alan Mullaly JIM WATSON/AFP/Getty Images

By David Kiley

Ford (F) was primed to beat expectations when it reported its second-quarter earnings on Thursday morning, July 23. After all, two of its chief rivals are just out of bankruptcy, the company just received its best car-quality ratings ever, and its executives and workers seem determined to survive the recession without a government bailout.

Indeed, Ford reported a surprise $2.3 billion net profit for the second quarter, a huge improvement over its year-ago loss of $8.7 billion for the quarter. That was made possible by a $3.4 billion gain from the company's reduction of debt; on an operating basis, without that, Ford lost $424 million, or 21¢ a share. Still, the consensus estimate of analysts, according to Thomson Reuters (TRI), had been that Ford would post a second-quarter operating loss of 53¢ a share.

But the Dearborn (Mich.) automaker isn't out of the woods yet. Its car-making operations aren't profitable yet. And it hasn't had the benefit of being relieved of many billions in debt through the bankruptcy process, as has General Motors. But what Ford does have going for it is momentum, say analysts, that should position it better than its Detroit rivals in an economic rebound. "The company is doing a lot of things right," says Merrill Lynch analyst John Murphy.

Liquidity Not a Problem

Ford has, in fact, increased its total share of the U.S. auto market to 16.1% in the first half of the year, up from 15.5% a year earlier. (It reached 18% in June in part because of a spike in sales to car-rental fleets, as Chrysler was not selling any vehicles.) The big worry is how much cash the company is burning and the $25.5 billion debt it is carrying. Ford used up $3.7 billion in cash reserves in the first quarter. In the latest quarter, it cut that burn rate to $1 billion, and ended the period with $21 billion cash on hand.

Ford's debt will rise to $40 billion by 2011, according to a July 17 e-mail from Himanshu Patel, a New York-based analyst for JPMorgan Chase (JPM). At an event Tuesday previewing Ford's 2010 model line, Chief Executive Alan Mulally told reporters that the automaker was on track in dealing with its debt. "We have a sufficient amount of liquidity to finance our entire transformation," Mulally said. "As we continue our road to profitability, the cash flow will just accelerate the improvement of our balance sheet."

While GM and Chrysler slashed debt through court proceedings—inGM's case, from $70 billion to less than $17 billion—Ford has been doing it in the market. The company last April sliced nearly $10 billion off its debt load, a move that will save $500 million a year in interest payments, through a series of restructuring initiatives, including swapping some equity for debt. That task became easier as Ford shares climbed more than 500% since last November, when it reached a low of 1.01 per share. Ford shares closed at 6.40 on July 22. The shares have more than doubled this year, for the third-largest gain in the Standard & Poor's 500-stock index.

More Debt Retirement Possible

A few analysts have target prices on Ford shares of above 8 a share. Indeed, the momentum behind Ford's shares may move the company to issue more shares to retire more of its debt.

Ford, like all automakers, has been hammered by the 35% falloff in U.S.

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