Credit analyst doesn't see Ford improving yet, despite convertible

By Ronda Fears

Nashville, Tenn., April 18 - With continuing losses at Ford Motor Co., and although the automaker exercised some muscle in the capital markets with its recent convertible offering, there has not been much improvement in the credit, said Carol Levenson, director of research at Gimme Credit.

"Although we believe Ford (Baa1/BBB+), which reported its first quarter results [Wednesday] and, maintaining the new industry trend, beat expectations and raised hopes for the rest of the year, provides considerably more financial detail than its peers and is especially giving to its fixed income investors, it still leaves us wanting more," Levenson said in a report Thursday.

"Since this is a 'transition year' for Ford, meaning it's still losing money, it probably doesn't do to dwell too much on actual results."

It would be nice, the analyst noted, if the auto companies reported information in a uniform manner that was easily comparable between companies.

Specifically, she said she would like to know what the incentive programs are really costing carmakers, what their new product costs are, what's happening with their labor costs and productivity, what their most profitable vehicles and options are and just how profitable each product line is.

Ford lost $100 million in the first quarter, a negative swing of $1.2 billion.

Despite dramatically lower earnings from financial services, Levenson said the company would have lost a whole lot more money without this segment. In the comparable quarter last year, the company actually made money in its automotive business, she noted.

Although the analyst said the conference call on Wednesday was "oddly upbeat - the benefit of low expectations, we presume," nearly every statistic in the first quarter was either somewhat weaker or much weaker than in the prior year, including revenues, costs, marketing expenses, market share, vehicle sales, sales mix and asset quality at Ford Motor Credit.

The only businesses that showed higher earnings were Ford Europe, largely the benefit of new goodwill accounting, and the "Rest of the World" where Mazda lost less money than last year.

She also noted that Ford Credit's chargeoff, loss severity and delinquency statistics, while weaker than the prior year's, did improve from the fourth quarter, and leverage was slightly lower thanks to the parent.

However, since asset quality statistics tend to have some seasonality, the analyst said it would be more impressive if and when year-over-year comparisons turn positive.

The one area where the company had something to brag about was its automotive net cash position, which by the company's calculation improved by $3.7 billion in first quarter.

"This was quite a feat, considering automotive free cash flow after dividends was negative $1.3 billion, the result of the loss, higher capital spending, an increase in inventory and a capital contribution to Ford Credit," Levenson said.

"We finally reconciled ourselves to considering marketable securities and VEBA investments as cash, but we will never consider Ford's $5 billion in trust preferred as un-debt."

The fact the company was able to issue this paper speaks well for its financial flexibility and ready access to the capital markets, the analyst said, and it certainly raised cash, but its balance sheet strengthening aspect is controversial.

"After all, the preferred has a 6.5% coupon and other debt-like characteristics. So if we were to include it in debt, we would see net cash declining in the quarter by $1.3 billion - coincidentally, the amount by which free cash flow was negative - rather than improving," she said.

"You say potato and we say potahto, but this credit is not improving just yet."

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