Ford's (NYSE: F) recovery has hit some
impressive milestones recently. Consider:
Profits! A billion dollars worth of
operating income in the third quarter, including $446
million from "automotive," meaning the business of selling
cars and trucks.
North American profits! Ford's North
American operations were profitable for the first time
since
2005-- $357 million worth of pre-tax profits, to
be exact. In fact, of Ford's major operational and
financial divisions, only Volvo -- which is in the process
of being sold (probably to China's
Geely Automotive ) -- lost money.
Credit upgrade! After pondering Ford's
latest quarter,
Standard & Poor's upgraded the
company's debt rating a notch to B-. That's still junk bond
territory, but it's a big psychological step up from the
"highly speculative" CCC+ rating they had before.
Moody's (NYSE: MCO) announced a similar
upgrade the day before.
Consumer Reports! The venerable consumer
watchdog might not be ready to declare Ford's products
quiteequal to quality kings
Toyota (NYSE: TM) and
Honda (NYSE: HMC), but they have made a
point of acknowledging that Ford has made tremendous
strides and is, finally, in the neighborhood -- and
eclipsing its U.S. rivals in the process.
CEO Alan Mulally and his management team are moving the
company through its turnaround plan in impressive style. If
they keep it up, Ford's turnaround will be a legend for the
ages -- or at least, a key MBA case study for decades.
But how are they
reallydoing?
A deeper look at the numbers
Let's start with some basics. Ford's market cap is
roughly $26 billion. They have $23.8 billion of gross cash on
hand (up from $21 billion last quarter). On the other side of
the balance sheet, what they call "total automotive debt" is
$26.9 billion, up from $24.2 billion at the end of 2008.
Ford Credit's financials are more complicated, but long
story short: They're making money and have reduced their
leverage, meaning the ratio of assets on hand to equity.
Leverage is a key metric when evaluating banks, and it can be
calculated a couple of different ways depending on how one
accounts for certain derivatives, but in this case, the more
conservative calculation puts it just under 10,
which is good.
Good thing, too, because they're going to need a steady
cash flow to service all of that operational debt.
About that debt ...
On Tuesday, Ford announced the sale of $2.5 billion in
"senior convertible notes" -- bonds that mature in 2016 with
a 4.25% coupon or are convertible to common stock at $9.30 a
share. Ford is also planning on issuing more common stock, up
to $1 billion worth.
These issues will dilute the value of the common stock --
by about 7%, according to a
Goldman Sachs (NYSE: GS) estimate, of course
that was before Ford increased the sale by $500 million and
allowed and underwriters option of an addition $375 million.
But I don't expect them to be a significant drag on the
stock's performance going forward.
Ford's also doing some more restructuring of its existing
debt, specifically a $10.1 billion revolving credit line due
to be repaid in December of 2011. They've asked lenders to
extend the due date to 2012 "in exchange for reducing
lenders' commitments and increasing interest margins and
fees." This and a couple of related deals are the "mother of
all subprime mortgages" -- the
credit linethat was set up by Goldman Sachs,
Citgroup (NYSE: C), and
JPMorgan Chase (NYSE: JPM) for Ford back in
2006, shortly after Alan Mulally's arrival. Why the nickname?
Because the debt is secured by pretty much everything of
value that Ford owns. Continued... |