Ford Rides the Low Road


By Kathleen Kerwin How much further can Ford Motor's stock sink? Just as shares started recovering from 11-year lows of $6.58 on Mar. 11, more bad news hit -- this time a 17% cut in Ford's second-quarter production plans. The announcement dragged the blue chip back down again on Mar. 14, when it closed at $6.76.

Most Wall Street analysts dismiss the rumors of bankruptcy that swirled earlier in the week and predict that Ford (F) has probably bottomed out. Investors with a long-term horizon might find the shares worth taking a chance on at this price, but don't expect a rebound any time soon.

The auto maker's debt leverage and pension shortfalls are alarmingly high, and it has yet to prove that better cars and trucks are on the way. Facing an uncertain economic outlook and a host of operational and financial difficulties, its shares could bump along at their current depressed levels for quite a while.

TOO GLOOMY? Chalk up Ford's troubles so far this year to investors' war jitters and uncertainty about the economy. (The stock was trading as high as $12 in December.) Amid all the gloom, investors zeroed in on Ford as one of the weakest of the manufacturing giants. A temporary ray of light appeared the week of Mar. 10, when UBS Warburg analyst Saul Rubin upgraded Ford stock from reduce to neutral, saying the market's outlook on the company's near-term prospects had become "unduly pessimistic." He added that "the sentiment pendulum swung too far too fast" and said Ford shares have gone as low as he expected them to go.

Still, the stock took another jolt when Ford announced late on Mar. 13 that it will cut second-quarter production to 980,000 cars and trucks. Analysts at Merrill Lynch and Bear Stearns promptly lowered their earnings forecasts, figuring decreased output would translate into diminished sales and profits in the second quarter. Although Merrill analyst John Casesa said Ford stock is now near its bottom, he also wrote: "We believe that deterioration in industry fundamentals, Ford's operations issues, and balance-sheet pressures will prevent the stock's multiple from expanding."

Ford Chief Executive William Ford Jr. has promised Wall Street that his company will eke out a small profit this year. In 2002, Ford lost $980 million on sales of $163 billion, compared with 2001's $5.45 billion loss on $161 billion in revenues. But Ford's 2003 forecast is based on a series of rosy assumptions: healthy industry sales, flat pricing, and steady market share for Ford. If a war with Iraq and its aftermath lead the economy from stagnation into recession, as many now fear, the carmaker will likely miss its 2003 targets.

IN THE DUMPS. To counter rumors of an impending credit downgrade, S&P recently affirmed its ratings on Ford and Ford Credit at BBB -- two notches above junk status. But ratings agencies are likely to revisit those results if the economy, and Ford profits, weaken further. Goldman Sachs analyst Gary Lapidus forecasts that Ford's auto operations will lose $850 million this year, "which is below S&P's stated breakeven benchmark necessary to avoid a 'reassessment' of Ford's credit rating." Lapidus anticipates a one-notch S&P downgrade of Ford debt to BBB- by summer.

Ford's bonds already trade at junk prices. And the carmaker's high debt levels contribute to market jitters. Sean Egan, a managing director of credit research firm Egan-Jones, takes a dim view of Ford's leverage: $162 billion billion in debt vs. $5.6 billion in shareholder equity, as of December 31, 2002. The Wynnewood (Pa.) firm has been predicting since last year that Ford will be forced into bankruptcy.

Still, such fears appear to be overblown. Ford's cash position is $25 billion and growing, and its net automotive cash hoard (excluding its Ford Credit business and debt) stood at a healthy $11 billion at the end of 2002. Most of the $148 billion owed by Ford Credit and the company's other financial operations is backed by auto receivables. And the average maturity of Ford's $14 billion of corporate debt is measured in decades, with little of it due to be repaid in the next few years.

REBATES LOSE STEAM. Ford's U.S. pension shortfall at the end of 2002 hit a worrisome $7.3 billion. The company argues that this obligation remains manageable. It kicked in a $500 million voluntary contribution in January. Ford faces no mandatory pension contributions until 2007. But declining stock prices continue to erode the fund. Soaring health-care obligations are another worry. Ford expects its retiree health-care and life insurance costs to rise 14% this year, to $2.5 billion.

Actually, the whole auto sector faces tough going. Concerns about auto stocks ratcheted into high gear when the final tally of February sales showed growing industrywide weakness. North American sales for the month fell 7%, running at a tepid seasonally adjusted annual rate of 15.4 million, vs. a year-earlier 16.6 million pace. Bad weather across the nation was blamed for some of the weakness, but analysts worry that larger economic forces are at work and that auto sales could continue to deteriorate. Word so far is that March sales remain lackluster.

Ford's February sales were actually flat -- good news compared with rival General Motors' (GM) decline of 19%. But a closer look revealed that Ford's recent strength came mainly from low-profit Taurus sedans to commercial and daily-rental fleets. More alarming for Detroit is the dawning realization that customer incentives such as cash rebates and no-interest loans seem to be losing their drawing power as the novelty wears off.

If bigger givebacks are needed to spur new demand, GM, as a low-cost producer, can best afford to keep rolling out big incentives. But playing catch-up wreaks havoc on Ford's already shaky bottom line. And that, in turn, is likely to keep Wall Street edgy about the carmaker's stock prospects. It may be in the bargain-basement bin for some time. Kerwin covers Ford as Detroit bureau chief for BusinessWeek


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