Credit analysts divided on Ford's performance, outlook

By Ronda Fears

Nashville, April 17 - Credit analysts are at odds over the results that Ford Motor Co. rolled out, much like the rating agencies.

Carol Levenson, director of research at Gimme Credit, sees more downside in Ford paper, noting that while she was positively surprised by strengthened liquidity, particularly at the Ford Motor Credit Co. level, she is concerned about cash flow in the automotive group.

CreditSights analysts Glenn Reynolds and Nesche Yazgan, however, are much more upbeat on Ford, asserting the bottom line results underscore progress on cost-cutting and stabilizing the core auto business.

Reports on Thursday out of both research shops point to similar divisions of thought on Ford between Moody's Investors Service and Standard & Poor's.

"Ford can't control the direction of the stock market but if the capital market backdrop holds the line and they can continue to execute on cost cutting, especially in the context of the UAW contract talks, it would take a major shift in sentiment for the Moody's rating at Ford Motor Credit to fall from A3 all the way to junk," said Raynolds and Yazgan in their report.

"S&P, on the other hand, has been more militant."

A month ago, the bond market was in full panic mode and Ford paper was in freefall, but has since begun to recover and even rally.

After Ford's first quarter earnings release on Thursday there was much celebrating, as the company reported earnings per share that doubled the consensus expectations, showing a billion dollar improvement over the prior year's loss.

Positive surprises, however, can say as much about poor earnings visibility as negative surprises, Levenson said.

While acknowledging that liquidity has been strengthened notably just in the past three months, Levenson expressed concern about cash flow in the automotive segment.

"Ford's dramatic year-over-year improvement in automotive net income occurred despite a tough pricing environment and a big increase in some costs, thanks to a remarkable $600 million benefit from the company's ongoing cost reduction program," Levenson said in her report.

"We note, however, that Ford Motor Credit paid the automotive sector a billion dollar dividend in the quarter, while the inter-company cash traveled in the opposite direction in last year's quarter. In other words, automotive cash flow failed to keep pace with the earnings improvement, partially due to a billion dollar pension fund contribution."

CreditSights analysts Reynolds and Yazgan said the performance in Ford's North American automotive unit will keep the debate going on "the magic S&P metric on automotive profitability" a little longer.

"At the very least, the solid automotive performance should muzzle S&P for a while with respect to its discretionary move in determining when Ford will flunk the 'automotive breakeven test,' " the analysts said in their report.

"That debate is just one more variable to price on technical risk and the performance on the unit cost side demonstrates that the new team is executing on costs even as the table is set for what will be for Ford the mother off all UAW negotiating rounds in the fall."

Decent April sales numbers and some more upbeat comments out of the equity sellside bears could get the market worked up and set the technical tone for putting the name in better stead, the analysts said, noting that some equity players are already backpedaling.

This would leave the technicals of the market as the big swing factor. Levels on Ford paper are well behind mid to low BBB wireless names that had 40 to 50 point swings in the last year, they said, so there is at least a relative value story to pitch at Ford Motor Credit.

"Our bias has been for tightening on the back end of strong corporate technicals, but it seems Ford is trying to make a case that fundamentals are falling into line as well," Reynolds and Yazgan said.

"That may be a stretch on only one quarter and even two quarters, but the big story will be the second half recovery questions, the UAW outcome and the direction of the pension numbers."

Pension numbers aside, Ford can brag that it had share, mix and volume on its side this quarter and the company has been more bullish on April numbers, they said. Price deflation continues to haunt this industry and that is not going away any time soon, so Ford will continue to be tested every quarter.

"One additional piece of disclosure that Ford Motor Credit provided as a slide in its presentation detailed the receivable liquidation schedule versus the debt maturities," the analysts said.

"The concept behind the schedule is clear enough and one which we find useful as anti-anxiety medicine for those who may think Ford Motor Credit has a liquidity crisis on its hands. As we have said, Ford has plenty of problems, but default risk and funding options are not among them, especially at Ford Motor Credit, the primary issuing entity."

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