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Ford seen on brighter path despite rough road

The carmaker's stock is up, helped by the perception that it can go on without a government bailout.

April 14, 2009|Ken Bensinger

Ford Motor Co. has long maintained that a bankruptcy filing by one of its Detroit competitors could have disastrous effects on it as well.

Wall Street seems to think otherwise.

With bankruptcy rumors growing ever louder, General Motors Corp. shares have struggled to reach $2 in recent months, falling 33 cents, or 17%, to $1.71 on Monday after a Standard & Poor's downgrade drove its bonds to record lows.

Ford, meanwhile, has been steadily climbing, rising 2 cents to $4.26 on Monday. The stock is up 169% from its $1.58 close Feb. 20. Standard & Poor's on Monday upgraded Ford's bonds, citing a successful debt swap. The automaker's market capitalization, at $10.3 billion, is now 10 times that of GM.

"Ford's image is now that of a company that can stand alone and doesn't require outside assistance," said Michael Robinet, vice president of auto industry consulting firm CSM Worldwide.

He points to the fact that despite Ford's own financial woes -- including a record 2008 loss -- it has benefited by refusing a government bailout and instead working to cut costs on its own.

"Ford has done a good job of positioning itself in terms of a good Detroit versus bad Detroit idea," Robinet added.

The market's confidence in Ford would seem to fly in the face of conventional wisdom that a bankruptcy by any of the Big Three automakers would disrupt the supply chain, bringing the entire industry to its knees.

After all, according to CSM, 60% to 70% of GM's suppliers also sell parts to Ford and Chrysler, and supplier woes can shut down assembly lines at multiple manufacturers simultaneously.

Bankruptcy would ostensibly help GM or Chrysler break contracts with the United Auto Workers union and unload billions of dollars in debt in a sweeping fashion unavailable to Ford. That, in theory, would provide a competitive cost advantage to the bankrupt automaker.

But increasingly, investors are bucking conventional wisdom when it comes to Ford. The automaker has several things in its favor.

First, Ford's decision not to ask for bailout loans not only kept the Dearborn, Mich., company away from federal intervention in its affairs, but also convinced the U.S. public that it was somehow different.

A study released last week by AutoPacific showed that 72% of respondents would be more likely to consider Ford vehicles because the company didn't take money from Washington.

And while GM and Chrysler have been busy coming up with restructuring plans and attempting to comply with requirements of the $17.4 billion in government loans they received, Ford frantically cut costs.

Last week, the automaker said it had swapped $9.9 billion, or 28%, of its outstanding debt for equity, a roaring success considering the fact that GM has been unable to execute a debt reduction with holders of $27 billion in its bonds.

Ford also crafted a new agreement with the UAW that will substantially reduce labor costs, and has persuaded the union to accept equity for as much as half its $13 billion in cash obligations to a retiree healthcare trust fund.

"We are increasingly comfortable with Ford's ability to maintain minimum cash levels," said Barclays Capital auto analyst Brian Johnson, who predicted that Ford would be able to avoid bankruptcy even if sales fall below currently depressed levels.

Ford also appears to believe that it would receive any concessions won by GM or Chrysler in their continuing negotiations with the UAW, which JP Morgan Chase analyst Himanshu Patel called "a material source of upside" for the automaker.

On top of that, said Shelly Lombard, debt analyst at research firm Gimme Credit, the government may indirectly protect Ford should things get really hairy in Detroit. Citing the Obama administration's willingness to "support auto suppliers," she said that "the chance that a General Motors or Chrysler bankruptcy will drag Ford into Chapter 11 has lessened."

Still, a Ford investment is not without risks.

The company lost $14.7 billion last year, and the only reason it didn't have to take government aid was because it borrowed $23 billion in late 2006 -- a move that at the time provoked harsh criticism of Chief Executive Alan Mulally.

Wall Street still has its bones to pick with the company's capital structure, as seen by its credit ratings that remain in deep junk territory. Plus, with Ford's U.S. sales down 42% through the first three months of the year, analysts worry that sustained declines in sales eventually could push Ford into Washington's arms.

Others still worry about the effect of a parts disruption from a GM or Chrysler bankruptcy, even with the Obama administration offering $3.5 billion in loans to troubled suppliers last week.

"The failure of competitors or key suppliers could further complicate Ford's situation and cause it to ask for the government loans that it is trying to avoid," S&P said Monday in its rating of Ford.

For its part, Ford maintains that all is going more or less according to the plan established by Mulally when he came on board in late 2006: to reduce its dealer count, sell off brands such as Jaguar and Land Rover, cut production to meet demand and globalize its vehicle lineup to reduce costs.

Ford spokesman Mark Truby said that even the brutal economic climate hadn't pushed it too far off course, even if it has had to offer support to a few crucial suppliers or cut production a bit faster than intended.

"The message is getting though," Truby said. "We can accomplish this on our own."

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ken.bensinger@latimes.com

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