Through TheFLY's Eyes: Ford

from Joseph Lazzaro of Theflyonthewall.com




















Ford Hopes Its New Debt Becomes A Solid Investment

No. 2 U.S. automaker Ford (F) said Monday it expects to borrow $18B and back its loans with collateral for the first time.

The venerable U.S. automaker said it needs the money to continue to implement its major restructuring. CEO Alan Mulally said Ford needs the capital to help pay for a buyout / workforce reduction for 40,000 Ford employees, as well as to pay for additional plant/operational modifications.

Like General Motors (GM), Ford is in the midst of a major transformation, the success of which will have much to say regarding the sustainability of each company. High gasoline prices, and a dearth of innovative cars have propelled consumers to buy foreign vehicles, particularly cars manufactured by Toyota and Honda. Moreover, as with GM, the changes at Ford do not simply amount to developing 2 or 3 “must-have cars,” although that is daunting enough. Ford and GM also must substantially reduce assembly and employee benefits costs to bring them in-line with foreign competitors, including buying-out selected employees. And buy-outs require capital, hence Ford’s Monday bond announcement.

The market’s reaction to Ford’s announcement? Moody’s lowered Ford’s unsecured debt rating to Caa1, seven steps below investment grade. Meanwhile, Ford’s shares dropped 26c to $8.26 in afternoon trading Monday. GM declined 71c to $30.52.

Investment Analysis: Is Ford suitable for the typical investor? No. Ford remains a high-risk investment: Ford still must demonstrate that it can leap over several operational hurdles before Wall Street can declare its restructuring a success. Therefore, unless you can tolerate losing a substantial portion of the money you invest in Ford - for example a 60%-70% decline - avoid Ford, for now. The investment analysis for GM is slightly more-positive, but GM also is a moderate-risk investment, not suitable for conservative investors.