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The Ford Debt Disaster Continues

by: Stephen Rosenman August 10, 2008 | about stocks: F    

Stephen Rosenman

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Ford (F) produced its SEC 10Q last Friday showing an incredible $166 billion debt divided between its auto division ($25 billion) and financial services division ($140 billion). For a company that no longer earns a profit, and hasn't had consistent earnings for years, this is ominous. This is a $9 billion market cap company with $1.7 billion in equity.

Investors have to date focused on the auto division's inability to sell cars. The rapidly declining credit division should also be a worry. Remember that $140 billion in debt depends on Ford's SUVs and trucks retaining their value; that's what Ford depends on to make good their startling debt. Unfortunately for the car industry, these vehicles have been rapidly losing their worth.

The 10Q speaks to "significant decline in used vehicle auction values during the second quarter of 2008". Look, in the future, to increasing write offs in their credit division making it even more improbable that they will be able to keep up with their debt obligations. Also Ford will be on the hook for possible dealership busts where money cannot be repaid for financed cars, something as yet that the company has not yet faced.

The balance sheet Ford has delivered in its SEC 10Q is bad. It is interesting to note that Ford does not provide a complete balance sheet to investors until they publish their 10Q, something that occurs weeks after their earnings release and conference call. They haven't done that for a long time. One wonders if this is designed to give the bad news at a time when the spotlight is off. Most companies, including GM (GM), provide investors with their financial statements at the time of their earnings release.

Disclosure: Author holds a short position in F, no position in GM

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This article has 26 comments:

  •  
    Aug 10 08:44 AM
    That is a good analysis of a snapshot. Your comments on debt is a common theme right now.

    I disagree on the level that the debt is completely poor. If they sold this debt off they would get much less then the loan loss value of the debt out there. They need to ride it out. That is the best thing for the current stockholders.

    But what is clear which is what I think you are speaking to. Is american auto industry need to work on understanding making and selling cars at a profit. All of this financing mumbo-jumbo has deluded their ablility to perform well against their competition. The American auto industry has relied on financing to sell the car and less on the car.

    Seeing what I am seeing from Ford, I think they get that. It would appear they are trying to reduce models down to what sells and build off of that. GM seems to be moving a little slower in that direction but toward that direction. Chrysler is not transparent enough but seems to be looking to building production effiencies to make their cars profitable.

    Ten years ago the american auto industy had good years but they again lost their way. Twenty years ago the American auto industry was beaten up like it is today and they came back.

    The problem is the american auto industry need consistant stewardship. They make good cars and have good ideas. But they continue to take their eyes off their products and its values and depend on finding profits outside of their core products.
    Reply
  •  
    Aug 10 09:49 AM
    Jeffy--Yes The US makes cars that people want. The US was first with vans, SUVs and pickups. The Jappies were always following and never first. Their only first is the hybrid which is a small unconfortable car that will soon be gone. Then why are the US companies in bad shape?

    Its spelled Unions!! The Japanese build cars in the south US where there are "right to work laws". The US will be able to compete after a national "right to work" law is passed.

    Reply
  •  
    Aug 10 09:58 AM
    Another clueless analysis by another SeekingAlpha analyst who has no understanding of the basics of the Auto industry.

    "Remember that $140 billion in debt depends on Ford's SUVs and trucks retaining their value"
    --this is true only for lease vehicles which has been the hot problem of the day, but Ford leases fewer than 13% of its vehicles. The rest of this debt is backed by loans, which depends on people making their payments, independent of the vehicle value. Since the Auto finance companies, unlike IndyMac and their ilk, did not get into the "liar loan" business, these loans have not experienced the problem mortgages have. Also, nobody purchases a car assuming it will appreciate in value and most people have some form of equity in a car purchase (trade in or some cash), so falling resale values result in delayed new purchases not defaults. Which is why we are seeing the worst US auto sales market in 16 years and why neither Ford Credit or GMAC have written off bad loans.

    A major chunk of the Ford debt is for long-term retirement and health care costs which were addressed in the last union contract and will begin to come off the books after the VEBA is set up. The high 1 time charges are a result of Ford replacing their high cost senior UAW workforce with low cost new UAW employees. Unlike GM & Chrysler all Ford job classifications come with the lower wage structure.

    With the new contract, Ford will be able to build vehicle in the US at a competitive cost. The previous contract had very high costs and only high margin vehicles (large cars & trucks) could be produced profitably.

    As oil prices continue to decline and the $ strengthens, gas will get much cheaper, I expect around $3/gallon in late fall. If the credit crisis & mortgage crisis are eventually resolved and new home sales recover, the pickup truck market will see a big lift as contractors replace equipment. The SUV market will stay permanently smaller.

    Ford and GM have a number of very good small, fuel efficient gas and diesel vehicles in Europe and Asia (where consumers have been buying them for longer than the last 6 months) that are tooling up to produce in the US.

    Lastly, remember that Kirk Kerkorian bought this company at $8.5 and plans on doubling his $. I trust his analysis, and Jerry York's, much more than yours. Have fun eating your short.
    Reply
  •  
    Aug 10 11:01 AM
    User213180 is right on! Back when Ford management caved in to union demands, the downdraft started. Here in the U.S. we still need pickup trucks and SUVs in many locations and there will always be a demand for such. Can your little 60 HP vehicle tow a stock trailer full of 10 to 20 fat steers to market? Can it tow one of the millions of recreational travel trailers? Can it deliver those goods to Wal-Mart, the same as an eighteen wheeler does? Can it bring a five ton load of wheat, corn, soybeans, etc., to market? Think about it. All we need is automotive management that can perform in stiff competition.
    Reply
  •  
    Aug 10 11:07 AM
    To jeffy , you are clueless. It's plain and simple. If oil as an example came down to 50 -60 bucks a can or $1. 75 to $2.00 at the pump, and thats where they should be i might add, they couldn't make cars or trucks fast enough. You have so called leadership in the white house, the Baffoon in charge, that cares more about making money for his friends and i might add himself, than he does for the people of the United States Of AMERICA. Period. And as far as the Unions are concerned, they have done more and gave more concessions than anytime in history to help the auto companys. They get it. You don't jeffy... Are you out of a job jeffy..? Keep buying non American.
    Reply
  •  
    Aug 10 11:28 AM
    it's not just about unions...it's about management, who agreed to every union contract ever signed. management who, year after year, paid out fat dividends to shareholders instead of retaining earnings for reinvestment. management who produced too many look-alike brands and models for too many years. management who, ignoring the lessons of the first oil shock of the 1970s, put all it's eggs in the SUV/minivan market because it was more a more profitable niche. even in that markets, japanese models are far more fuel efficient than their american counterparts. look at any quality survey of the past 30 years and you will find american cars in their usual slot as also-rans, far below japanese models. it's a gap that american manufacturers have never been able to close. domestic market share of the u.s. manufacturers has steadily eroded and it's picking up speed...47% share in early 08; about an 11 point drop in the last 4 years alone.

    as for kirk kirkorian, even investors with good track records make stupid movies.

    it is highly likely that the u.s. automobile industry will need federal help to survive. if they're willing to save the morons on wall street, fannie, freddie, et al., i suspect they'll be willing to throw a few sheckels to once-proud american icons ford and GM. but as for long term investment, there is no evidence of performance to suggest that these companies have what it takes to turn it around. the GM board's pronouncement that it has "faith" in rick wagoner suggests to me that they don't have a clue.



    Reply
  •  
    Aug 10 12:02 PM
    JEFFYBOY, YOU SAID: "I disagree on the level that the debt is completely poor. If they sold this debt off they would get much less then the loan loss value of the debt out there. "

    ummm... "if they sold this debt off"....? their debt is not an asset last I checked... explain to me how they'd "sell this off"?
    Reply
  •  
    Aug 10 12:02 PM
    JEFFYBOY, YOU SAID: "I disagree on the level that the debt is completely poor. If they sold this debt off they would get much less then the loan loss value of the debt out there. "

    ummm... "if they sold this debt off"....? their debt is not an asset last I checked... explain to me how they'd "sell this off"?
    Reply
  •  
    Aug 10 12:12 PM
    Great comments ICANDOIT and I agree 100%. The problem is in management. Also, this is the last American car I buy for a long time. The service is LOUSY. The idea of making money on parts and servicing is not the same as it once was in this industry, the environment has changed.

    One of the biggest failures of management often occurs when the company stops conducting consumer research. The book Innovator's Dilema speaks into this. My company is a data company and conducts consumer sentiment, purchase intent, economic feasibility research continuously because it IS the business. Watching the emerging trends and the shifts trends makes it vastly easier to make decisions. In these days in America, it also pays to watch Washington which requires a lot more then just consumer research and survey/analytics. Washington drives everything beneath it so call Washington cause and Consumer Research effect.

    Yes Unions and globalization effect have had there part but conducting research is pennies on the dollar in investment to the long-term returns. It's laziness at management and such research often needs to be spearheaded by C level executives responsible for a company's performance. Such is the way of things when a nation's economy in a liquid environment when things became easy for top level executives. That critical hour a day on conducting primary research often went toward an extra hour at the yacht club.
    Reply
  •  
    Aug 10 02:59 PM
    icandoitdon shows the most insight, with his comments. I, personally, have never, nor ever will buy a Ford product; and it has everything to do with quality, not union workers. If Ford's management had focused on building a reliable product, over the past several decades, the sales would be there to support a union workforce, as was the case in the past. Short sighted management is to blame, pure and simple.
    Reply
  •  
    Aug 10 05:46 PM
    henje you say you will "never" buy a Ford product ... it's people like you who are our problem in the USA. JD Powers says that the new Ford products (the ones that compete with Camry and Corolla) are rated HIGHER than their Toyota counterparts! So the quality is there but you won't buy one? Loser ... "to blame, pure and simple."

    BTW, I ownd two Expeditions (1997 models) and put over 250,000 on them and never had a problem. I've owned two new GM products over the past bunch of years ... put over 300,000 on them and not a problem. I've also owned 5 new Hondas/Acuras and put almost 300,000 on them with no problems. To say that the American cars were somehow inferior the the Japenese was a lie "pure and simple."

    In fact, the 1997 Expedition and 2004 Tahoe are far superior to their Japenese competitors. Now it seems that the Malibu, Fusion/Millan, and Focus are rating higher than their competitors as well.

    But you won't buy one ... "EVER!" Loser and we'll see how your kids grow up in the USA. In fact you're probably not even a citizen of the USA ... at least you don't sound like one.
    Reply
  •  
    Aug 10 08:11 PM
    "look at any quality survey of the past 30 years and you will find american cars in their usual slot as also-rans, far below japanese models. it's a gap that american manufacturers have never been able to close."

    Icandoitdon, let's look at this year's JD Powers Vehicle Dependibility Survey. Mercury (the Ford division SeekingAlpha always wants to kill) ranks #2, after Lexus. Cadillac is #3. Toyota is #4, behind 2 US brands. Buick and Lincoln are ahead of Honda. Ford is behind Honda by a 0.25 defects per vehicle. Toyota's Scion brand is near the bottom with a 20% higher defect rate than Ford. Try using some facts next time.

    Wake up people the '70s are 30 years ago. At that time the quality "gap" was 4-8 defects per vehicle, not 0.25. The complaining you hear in the media and on the net about US car quality almost always comes from somebody that has never owned or driven one for the last 20 years, if ever (yes I know that some of the negative experiences are accurate. Every brand has its issues, surf the web and you will find people mad about Toyota and Honda quality also.)

    The big decrease in market share this year is because the market has shifted back to the cars, especially small cars where the Japanese are strong. The US companies gained share when the market shifted to trucks in 90's, where they were strong, you just never read about it in the media.

    GM, Ford, and Chrysler also have vehicles that get as good or better mileage than similar Japanese models, you just never read about that. Everyone, including the Japanese, have made their vehicles larger and more powerful over the last 10-15 years because gas was cheap and that is what people wanted. A 1980 Honda Accord gets better gas mileage than a 2008 Accord. All companies were building products that people wanted, bigger vehicles.

    Kirkorian made a huge profit when everyone said Chrysler was going bankrupt at the end of the 80's. He was right then and he is right now.

    Management was very deliquent in restructuring the fundamental problems in their union contract during the 90's when the companies were strong. GM tried in '98 and was struck for weeks. The union was never going to change when the companies were making big profits. With everyone's backs against the wall, fundamental change was made and the US 3 will have a very competitive wage & benefit structure in 2010 when the VEBAs are in place. They are making the hard decisions and they will pay off.


    Reply
  •  
    Aug 10 10:37 PM
    PhillyD, 1) "J.D. Powers says the NEW Ford products are rated higher than their Toyota counterparts." Quality, especially in automobiles, is judged over long periods of time. It is impossible to accurately determine reliability from a NEW product; that's just common sense. 2) You call me a "loser " because I won't purchase a Ford product. I think I'd be a bigger loser ( and a dumb consumer) if I were to purchase an inferior product just because it's American made. If mediocrity is rewarded,it will always be mediocre. In fact, if Ford has improved their product ,as much as you say, you probably have consumers like me to thank. Afterall, nothing stirs change,in corporate America, like dwindling profits. 3) You sure do drive alot!
    Reply
  •  
    Aug 10 10:46 PM
    why doesnt ford have enough confidence to guarantee the powertrain for 10 years or 100,000 mi.?i asked them & i got a cookercutty letter about quality etc. all bs.no real answer.if they build really good cars back it up with better than japanese guarantees & you will see sales increase. but they cant because the cars wont perform better.sad
    Reply
  •  
    Aug 11 01:40 AM
    user 223180:

    whether i always know all the facts is a fair point, but i try not to cherry pick them like you.

    in the 2008 powers survey you mention, 8 out of the top 10 brands with fewest defects per 100 were foreign names, half of which were japanese brands. mercury was #6 and ford was #8. yes, scion was near the bottom...right above dodge and chrysler. jeep was dead last out of 36 brands. maybe you want to argue that the germans trashed the quality of dodge/chrysler/jeep products, but their dead-last ranking is consistent with their troubled history.

    if some of the domestics are catching up that's wonderful....more power to them. i hope they make it but the odds are against them for many reasons, including the fact that customer perceptions are extremely hard to change once they become ingrained. for too many years, from lee iacocca forward, "quality" was a marketing slogan in detroit...not a commitment. they produced some of the worst cars ever made during the 1970s and 1980s. in the meantime, millions of would-be customers have permanently switched to those affordable foreign brands...mostly japanese...that have demonstrated reliability year in and year out.

    as for your contention that this year's market share loss of the domestics is attributable to consumer preference shifts to small cars, you miss the bigger issue. the domestics have lost market share year in and year out since the japanese entered the american market, including recent years in which truck and SUV sales were booming. look it up.

    the most absurd of your arguments is that unions are to blame for the fall of these once great companies. management was incompetent, my friend, and unions or not it's their own strategic decisions that have sunk them. if they at any time felt that union contracts would threaten the future of the business they were obligated to take a strike for the good of the business. they didn't do it because they were just as greedy as the unions...too many bonuses rested on their short term financial results and it was easier to cave. these companies were short term oriented, didn't adequately reinvest in the business, overemphasied marketing at the expense of production and engineering, had too many overlapping divisions, and they never took the japanese seriously when they first emerged on the scene in the late 60s/early 70s. they ceded the small car market to the japanese because there was more money in big cars. diversity of product line was never a strategic impertive. this is the second time those chickens have come home to roost and this time it could bury them.

    good luck with your investment.



    the link to the jd powers survey results is here:

    www.caranddriver.com/r...
    Reply
  •  
    Aug 11 04:57 AM
    Jeffyboy,

    "I disagree on the level that the debt is completely poor. If they sold this debt off they would get much less then the loan loss value of the debt out there."

    Who exactly would they sell existing debt to? Who has money to buy someone else's toxic investments (for that is exactly what ford has financed to the tune of 140 bn) when everyone in the world is scrambling to raise cash?? They should have done this 2 years ago and they would be smiling right now.

    Ford is a goner unless they get some sort of gov't (socialist) funding. What part of that is unclear to you?
    Reply
  •  
    Aug 11 10:06 AM
    Notsosmart, the Japanese don't warrant their car for 10years/100,000 miles either. The Koreans did, but even they are backing away from it.
    Any warranty is just a marketing tool. It is not a measure of quality. It is a cost which the manufacturer absorbs; same as a rebate of free service.
    Reply
  •  
    Aug 11 11:15 AM
    one other important point on earnings...ignore them!!! Look at cash flow! The earnings numbers ALWAYS have huge accounting charges in them. Last I looked, Ford was cash flow positive, thus not a likely candidate for bankruptcy. My money is with Kirk!!!
    Reply
  •  
    Aug 11 11:45 AM
    To jswede - Ford can't sell their debt. I think what Jeffyboy meant was that Ford could sell their $107 billion in finance receivables and use that money to pay down at least a significant portion of the $140 billion in auto financing debt.

    To Tony the Car - Your analysis is exactly correct. Warranties are a marketing tool, a calculated gamble by an automaker that the incremental profit by selling more cars will at least offset higher warranty costs. The Koreans did it only to build some much needed credibility, and you can bet the farm that it cost them PLENTY.

    To the Author and other Naysayers - Agree with earlier comments that management, not unions, are the root of the problem, but that's because management agreed to every stupid contract clause just to keep the plants pumping out trucks and SUV's. Fortunately both management AND the UAW recognize the landscape change is permanent and are taking the painful measures to adjust. Yes, it continues to be a gut-wrenching process here in Detroit. However, contrary to someone's earlier uninformed comment, LONG-TERM quality of Detroit products are on par with their Asian equivalents, and once the legacy and restructuring costs have been finally put to rest, Detroit automakers will definitely enjoy a strong resurgence.

    Go ahead and short, I'm buying calls because of a sound financial analysis, NOT because I'm from Detroit.
    Reply
  •  
    Aug 11 03:36 PM
    This is one lively discussion! I think this is the best article/response combo I have seen on SeekingAlpha. I have a Ford bond that matures in 11/08. I see no danger there; that is why I bought it. I don't have an educated opinion about F or GM, but I sure hope they can make it. A few decades ago, the auto industry was THE measure of the U.S. economy. If autos weren't selling, the entire economy would be in the tank. I know that has changed somewhat with the reductions in auto workers, overseas jobs, etc., but with auto sales hurting, housing lousy, credit getting harder to get, consumers spending less--what is there to stimulate this economy? Where is growth going to come from? I hope I am wrong, but it appears we are in for years of lackluster economic activity. Can F and GM survive it? I don't think we can know that now. I sure hope they do.
    Reply
  •  
    Aug 11 04:14 PM
    DEBT:140 billion in debt is well secured in relative terms - this is hardly Freddie or Fannie
    QUALITY: Ford has three years of Fusion an Milans beating the Camry and Accord in Consumer reports and two years of the Edge ranking with the Pilot and Highlander. The f150 is better than the Tundra - the disgruntled workers have been sent home, the outdated factories shut down - the CEO is a manufacturing guy who is looking for 800/1000 --Lexus numbers.
    PRODUCT: american cars have been wanting for years - but look at the cars Ford can design and build - the european Mondeo, Focus, Fiesta -these cars are better than the Japanese cars -much better in head to head comparisons. Ford will utilize its global prowess for the first time to get it right. Farley will make Mercury Ford's Scion, Lincoln Ford's Lexus and make Ford a Better Toyota. There is a well laid plan in place and they continue to execute on it. Volvo, 50% of Mazda and FMC can be sold when it makes sense -there is 38 billion in cash and credit, there is cash flow, there will be massive debt relief and overhead relief due to cuts - these guys are not going under.
    Reply
  •  
    Aug 11 04:31 PM
    I have had a lot of company cars over the last 25 years. Too many to count and all of them American made. I could have driven a foreign model but my customers are Americans so I like to support the home team. I don't hold it against someone for buying a foreign car but I can say that I have never had any real problems with any of the cars I have had and I put lots of miles on them. With that said, I have had problems with many of the dealers I have had to deal with. When I did have warranty work it was generally a problem to get it done without a fight. Many of the people I know who have switched to foreign cars have done so not because of the car itself but because the American dealers didn't treat them right. From my experience I would hate for my customers to have to buy my products through dealers like sell Fords and Chevys. The Big 3 need to clean this up. The dealers that don't treat the customer right need to be canned. Every product has a problem from time to time but if you take care of it you don't lose the customer to the competition.
    Reply
  •  
    Aug 12 09:43 AM
    I agree more with the third writer than I do the author of this article !! I own GM bonds and even though they are trading for 50 cents on the dollar at this point, they pay an attractive rate of interest and I will hold them until they are called. Ford and GM make great cars at this point in time, they are right up there with Japanese cars in terms of defects and styling. These people are shedding their retireees medical costs to the Union for cash which is a smart move, hiring cheaper help to replace active employees who are retiring and if you haven't looked recently, check out who is the leader of cars manufactured and sold in China ?? Its GM by a wide margin and given the potential population of China, they have a great lead over there. More and more profits from these companies will emerge from China, India, Brazil and other countries starting to emerge and create middle class consumer folks. Lastly think about the reasons that Japanese automobiles are not too popular in China and probably never will be !!!!!!!!
    Reply
  •  
    Aug 12 01:13 PM
    Lots of car buyers have been burned by JD Power surveys. The problem is, hardly anything goes wrong with any car in 3 years. What's that, 36k miles? Fords/GMs/Chryslers will all last this long, but between 50-200k miles is where the problems arise. In other words, it's not quality that's the problem, it's durability.

    Examples:

    All the 4 year old American cars on the road with the paint going bad.

    All the 5 year old Chryslers on the road with smoke coming out the tailpipe.

    My buddy's 04 Malibu needed a $600 water pump at 100k miles.

    My other buddy's 95 Lumina went through 3 alternators before reaching 100k.

    My wife's 02 Saturn, in which the whole interior rattles so bad you can't stand it - 60k miles.

    My 01 Ranger which pings incessently - 50k miles.

    The thing is, when you pay out as much for labor as these companies do, you have to cut back on materials and quality control. This makes your cars depreciate more rapidly than your more durable competition. The rapid depreciation and higher repair expectations run off your customers.

    It doesn't help that slogans like "Quality is Job One" were used to sell these junkpiles all along. Customers are becoming immune to the marketing and shunning these brands.
    Reply
  •  
    Aug 12 07:16 PM
    The US car companies have really found themselves out of position now that gas has gone over $4/gallon. My prediction: either the US auto makers will revolutionize and start putting out hybrids, yes HYBRIDS! or they will go the way of the dinosaurs. Hybrid is the wave of the future or actually is already here. The Japs have figure that one out!! Personally, I love toyota cars and the Prius is awesome at 45mpg!! I went shopping for one recently in my home town of Las Vegas and surprise they were sold out!! In fact the waiting line was 3 to 4 months or more to get a Prius. No surprise that Toyota is building a whole plant down south devoted just to the Prius. Eat that GM and F!! ha ha. The next car I buy will be a hybrid cuz I predict gas only cars will become devalued in a few yrs. Finally, I saw the new Ford Flex and was WOWED!! by it, but with a 3.5l and no hybrid available as well as a $38,000 sticker price forget it. Maybe in 2010 Ford will have the Flex in hybrid, but I doubt it. F and GM are way too slow and stupid. Obviously someone sold them a bum chrystal ball. Maybe Japs will sell them some tea leaves, ha ha. Now really finally: invest in copper cuz we are gonna start to use a LOT more of it when HYBRID comes the NORM.
    Reply
  •  
    Aug 13 06:51 PM
    Time is the key factor. It is running out for F and GM. In order to convert
    existing factories in U.S, from trucks to small cars will per conference call take 0.5 billion dollars each (suspect more). Add the already back breaking debt and time and money run out. F has been getting the benefit of the doubt from investors for the last 10 years (much like most of the above comments) but look again at the debt and what is backing it up (a stodgy poorly selling lineup of vehicles in a European-U.S. slowdown). When you buy your $5 a share stock, you are buying $160+billion debt in the hope that someday (or some decade), the thing can turn a consistent profit. Gee, just the interest on the debt should be enough to make sensible investors run, let alone F's repeated failure to make money.
    Reply
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