Ford: Best of a Bad Lot?


By Margaret Popper When you're thinking about Ford (F) stock, it's hard not to focus on the Firestone tire recall. The replacement of 13 million Firestone Wilderness AT tires on Ford vehicles could cost the company $2.1 billion this year and cut its 2001 earnings in half. Such a huge hit to earnings would be impossible to ignore, but it's likely to be a one-time adjustment.

The real challenge facing Ford is the shift in consumer tastes that will affect all U.S. carmakers. It appears the gas-guzzling sport-utility vehicle wave is about to break on the rocks of higher gas prices. But Ford may be the only U.S. car company with a potential backup plan for the SUV sales slump. Its strategy for coping with an SUV downturn: sell more luxury cars and engineer a turnaround in its European operations. These moves won't make up entirely for declining SUV profits, but at least they may provide a cushion that neither General Motors (GM) nor DaimlerChrysler (DSX) has.

The beating Ford's stock has taken as a result of the Firestone debacle may well have created a buying opportunity for some investors with a time horizon beyond 2001. And a decent dividend yield could add an incentive to buy the stock at current levels.

ROCKY ROAD. Detroit will see declining sales and margins until it can come up with some other vehicle that grabs the public imagination -- at a profit. Against that backdrop, Ford may be in the best shape of any of the American car companies, despite the negative publicity of the Firestone recall. That may sound odd for a company whose stock, at just under $25 a share, is 26% below its mid-April, 52-week high of almost $32 a share.

Ford still has a rocky road to travel in the coming months. Speculation is rife on Wall Street that a management shakeup is in the works. Although the $2 billion tire-recall set-aside should cover the maximum cost to the company, according to most analysts, the recall has other less easily quantifiable costs, such as lost Explorer sales. Right now, this SUV is Ford's main profit generator, and the company is continuing to ramp up to produce the 2002 model, though likely at lower profit margins.

"The SUV business is probably 80% of their profits, and the margins on that business are declining," says Domenic Martilotti, automotive analyst at Bear Stearns. Not that the story is any different for GM or Chrysler. Consumers are trying to shift to smaller trucks. The Explorer is king of the midsize range, so Ford sales have further to fall as big cars go out of fashion.

GOING LUXURY? In April, Ford resorted to dropping its offered financing on the Explorer to 4.9% until the end of June to keep unit sales up. That will help clear out inventories, about a third of which are probably old Explorers, estimates Ronald Tadross, analyst for Bank of America Securities. Sales in the second half of 2001 may come in below first-half figures, thanks in part to the disappearance of the low-financing sales incentive, according to Todd Nissen, Ford's financial news manager.

Also, Ford won't have the capacity to keep pace going into the second half of the year. "Production will drop by 60,000 in the second quarter," says Nissen. "What happens in the third quarter depends on where the market goes." Ford executives are hoping that at least some of it goes to luxury cars.

With models like the new X400 Jaguar, which will go into production in Europe, the company is making a concerted effort to expand its luxury brands into the higher-volume, lower-price end of the luxury car market. In that sector, autos cost about $28,000 to $35,000, and profit margins top out at $3,000. That compares to SUV margins as high as $15,000 on a high-end unit.

SLIM THREAD. Luxury-car profit margins aren't as sexy as SUV margins, but they're better than nothing at a time when U.S. drivers have grown weary of fuel-inefficient SUVs. "Luxury cars could be Ford's savior," says BofA's Tadross. He points out that the plant that's going to make the new Jaguars has been retooled from making the old Ford Escort.

If the luxury push seems like a slim thread for Ford to hang its hopes on, consider that competitors GM and DaimlerChrysler don't even have that much. "Luxury cars and Europe will soften the blow [of dropping SUV sales]," adds Tadross. "That's the best you can hope for among the U.S. auto companies."

Ford is also hoping that its newly revamped European operations will gain traction in 2001 based on sales of its Mondeo midsize family car, which it introduced in 2000, and its planned fourth-quarter launch of the latest edition of the compact Fiesta. Just the fact that Ford is updating its European line should help perk up sales. "The volume won't be huge, but Ford's products in Europe are 10 years old now," says Martilotti of Bear Stearns.

"A 1% RETURN." On the cost side, the company got rid of excess capacity in Europe by closing two plants and retooling a third. Although Ford Europe lost money overall last year, it showed a profit in the fourth quarter and in the first quarter of this year. In the face of the European economic slowdown, it could be tough to keep this trend up, but analysts find it positive that at least the company isn't losing money at the rate that DaimlerChrysler is.

Besides, Ford doesn't need huge profits from Europe to give it an advantage over competitors. "All they want is a 1% return on sales from Europe," says Martilotti. "On $3 billion of sales, that's $300 million -- but if they even get $200 million, it'll help their overall margins."

Still, it's hard to underplay Ford's difficult situation right now. The company says the tire recall will result in a loss of 35 cents a share in the second quarter and slash earnings for the year by $1.10 a share, down to $1.25 to $1.35 per share. Excluding the cost of the recall, analysts predict earnings per share of 76 cents this quarter and $2.43 for all of 2001, according to First Call data.

DIVIDEND PLAY. While First Call doesn't have consensus numbers on revenue projections, Martilotti predicts they'll hit $168 billion this year, 1% below last year. But he's predicting a 7% drop in GM's revenues this year. Of course, views diverge widely on how the tire debacle will affect Ford. Analysts' 12-month target prices for the stock range from $24 to $40 a share, according to First Call.

Yet even if you think Ford's plan to offset the SUV slump isn't the greatest, here's one more good reason to think about owning the stock. Ford's 2001 dividends should total $1.20 per share, since the company has canceled its stock buy-back plans. "The dividend yield on the stock is almost too attractive to pass up," says Tadross. "It's only about half a percentage point less than the five-year Treasury, which is trading at [a] 5%" yield.

With that kind of base yield and the possibility, maybe even the likelihood, that Ford will surprise the skeptics and weather the switch away from SUVs better than its competitors, don't be surprised if investors think it's worth taking a ride with Ford at $25 a share. Popper covers the markets for BW Online in our daily Street Wise column


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