No Big Pickup for Ford Shares


By David Welch and Kathleen Kerwin Ford Motor has had a rough couple of years. Its stock is stuck around $11 a share, close to a decade low. It lost $5.5 billion in 2001 and $230 million in the first half of this year. But the carmaker's new team of executives just had a pleasant little surprise for investors. On Sept. 9, Ford (F) announced that it would turn a slight profit for the third quarter -- instead of the $180 million loss that analysts had predicted.

Analysts immediately pushed up their earnings forecasts for 2002, to almost $720 million from previous estimates of $540 million. One reason, company executives said, is that their eight-month-old restructuring plan was starting to hit the bottom line. With profits now trickling in, and the possibility that Ford's stock has bottomed out, is it time to buy?

Hang on to the parking brake. While most analysts agree that Ford's stock is probably at or near rock bottom, few have reason to believe that it'll bounce back anytime soon. First, loose purse strings for marketing programs such as 0% financing and $3,000 rebates haven't been enough to prevent Ford's sales from falling 8% in a market that's flat vs. last year.

DELAYED EFFECT. Only a sustained flow of new cars and trucks will stop Ford's slide, and the company just doesn't have enough coming in the near future. Without new vehicles, it'll have to continue using rebates to sell its aging models.

Next, its restructuring program relies on designing new vehicles with cost savings built in, but those lean new-car programs won't hit the market for a couple more years. Says Prudential Securities analyst Michael Bruynesteyn: "I don't see a rebound anytime soon."

Blame that on Ford's dearth of fresh models. Bruynesteyn estimates that Ford will replace only 7% of the vehicles its sells with new cars this year, while its chief rival, General Motors (GM) has renewed 15% of its cars and trucks. Next year, Ford will redesign its F-150 pickup, the best-selling truck in the U.S., but that alone won't lift the Ford's sales and profitability enough to excite investors in the next few months. Says Sanford C. Bernstein analyst Scott Hill: "It's a long-term product recovery."

NO LAYOFFS. That means Ford will rely more heavily on cost-cutting to fatten the bottom line. It's barely eight months into an ambitious five-year turnaround plan. But efforts to slice $1.5 billion in overhead and $3 billion in material costs by 2005 are already running about six months behind schedule, Ford admits. And plans to close factories to align capacity with its diminished share are hampered by a union contract that forbids layoffs for another year.

Even this year's unexpectedly strong sales aren't likely to buoy Ford's stock much. The Big Three's torrid sales have come at the cost of heavy incentives, including 0% financing on even the newest 2003 models. That's cutting sharply into Detroit's profits, but Ford suffers the most. GM, as the lowest-cost producer of the three, has been leading the 0% loan charge. Chrysler (DCX), still struggling out of its own slump, largely has been offering extended warranties in lieu of 0% deals.

Ford has been forced to follow GM's incentive gambits because of its desperate need to stem market-share losses. By midyear, Ford was spending a historically high 15.6% of auto revenues on marketing. Even its 8% August sales gain didn't lift that month's market share above 20.2%, vs. 21.1% a year earlier, as industrywide sales surged 13%.

"STILL WELL FUNDED." Behind the near-term worries, though, loom even deeper problems. While Ford's pension liabilities aren't as severe as rival GM's, analysts worry that if the stock market continues to decline, Ford's plan could be underfunded by $5 billion to $6 billion in 2002, after being fully funded a year earlier. Ford says it won't be required to contribute extra funding until 2006, though it may make a voluntary contribution in the next few years. "We are still well funded," says Allan Gilmour, Ford's chief financial officer.

Nonetheless, pension liabilities are another albatross for Ford's stock. UBS Warburg analyst Saul Rubin says they're one big factor that indicates it's not time to buy the shares. On Sept. 3, Rubin downgraded Ford from hold to reduce, with a target stock price of $9.50.

The economy presents further risks. If the consensus of economists is wrong and a double-dip recession does develop, Ford could suffer the worst, given its older products and slower sales momentum compared with GM. Says Bernstein's Hill: "If an economic recovery doesn't materialize, you can envision Ford stock trading substantially below $10 a share."

Even if the economy remains stable, Ford has little to offer investors. It has a mid-decade profit target of $4.5 billion -- about six times this year's expected results. Even if it hits that, Ford would be trading at only between $12 and $16 a share. If that's the best-case scenario, Ford's stock may be languishing for some time. Welch and Kerwin write for BusinessWeek in the Detroit bureau


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