Ford: Bears vs. bulls
It's the healthiest of the Big Three automakers, but then again, look at the competition.
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| Bear: Brian Johnson, Barclays Capital |
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| Bull: Michael Ward, Soleil Securities |
NEW YORK (Fortune) -- Ford is ahead of rivals GM and Chrysler in restructuring its debt and winning concessions from labor unions.
But shares are trading at their lowest consistent prices since 1982 amid a severe slump in car sales, intense competitive pressure and worries about the impact on the entire American industry if one of the Detroit Three goes bankrupt.
Will Ford rebound as its rivals falter, or will debt weigh down the stock? We asked two analysts for their predictions.
"First, Ford (F, Fortune 500) owes $10 billion by 2013 to the United Auto Workers' health trust. It just agreed to deliver half of that in stock instead of cash. That implies $5 billion worth of stock at roughly $2 a share, and doubles the shares outstanding.
"Second, with $35.9 billion of debt (including a $10.1 billion revolver drawn in January), Ford is overleveraged.
"It has offered to convert some of its debt into equity - similar to what we've seen in the banking sector. The offer moves the company towards greater long-term viability. But assuming that 60% of bondholders agree to that, Ford would still have $30 billion of debt. That leaves open the possibility of future dilution from additional debt exchange offers.
"The outlook for auto sales is awful. Sales might get to 11.5 million vehicles this year, but that looks less likely every month. Unless sales pick up in the second half, Ford will burn through $12 billion in cash and have to get back-up money from the government.
"Ford is a great example of a company that's probably making the right operational moves given the environment and the longer-term shift to smaller cars. However, between the sales environment, the amount of debt it's had to take on to get through the downturn, and its amount of debt for post-retirement health care obligations, we don't see Ford shareholders making out. Our target is $1 a share.
"Investors can't just say, 'Okay, in 2012 Ford could make 'X' dollars per share, and therefore I should hang onto them.' What's happening in between is a cash burn so great that new debt is going onto the balance sheet.
"We're positive on Ford as a company. We just don't see shareholders making out."
"The marketplace is missing the fact that there will be five to 10 points of market share up for grabs in the U.S. as GM (GM, Fortune 500) gets rid of brands like Hummer and Chrysler makes cuts, and if either company goes bankrupt.
"Ford has lost market share every year since 1995, but now it's among the best-positioned to get some back. It ended 2008 with ample liquidity - $26 billion - so it's not going bankrupt.
"And Ford started restructuring in 2006, way ahead of the other Detroit companies. When they cut R&D, Ford didn't have to.
"Already there are positive signs: Since the bailout headlines hit five months ago, GM and Chrysler have each lost more than two points of market share, while Ford gained a fraction. You are seeing a separation between Ford, GM, and Chrysler.
"In very simple terms, if Ford had 15 percent of a 16 million vehicle market, they sell 2.4 million vehicles. If they have 18 percent of a 14 million vehicle market, they sell 2.5 million vehicles. They can sell more units in a smaller market by gaining market share, and that's one of the things being missed on the Street. Ford is at an advantage from a competitive standpoint.
"There are two parts of any restructuring - a cost component and a revenue component. On the cost side, Ford has reduced North American capacity 30% since the end of 2005, employment is down 45%, operating costs have been reduced by $5 billion, and discretionary costs will be cut by 20% or more. On the revenue side, the combination of new products like the Fiesta and disruptions at GM and Chrysler should enhance Ford's revenue restructuring.
"Ford shareholders could face dilution if additional liquidity is needed. But we believe the potential dilution is a fair trade-off if it means Ford is able to stay from government assistance and avoid outside control.
"Many money managers made their reputations buying auto stocks when they were down (Peter Lynch bought Chrysler in 1980). You have a chance to make money with Ford." 
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