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Profit goal pressures Ford

Automaker needs to break even on cars, trucks
January 29, 2003

Pressure is mounting on Ford Motor Co. to stop losing money making cars and trucks.

Profits from Ford's financing business made up for most of last year's automotive losses. But experts say that if Ford is going to earn $7 billion before taxes by 2006 -- as it has promised shareholders -- it needs to at least break even this year on its car and truck business.

Analysts are split over whether that is possible.

After an $800-million charge to reflect changes in accounting rules, Ford lost almost $2 billion from its automotive operations last year.

In a report Tuesday, Standard & Poor's Corp., the influential credit-rating agency, reiterated that it might downgrade Ford's rating if it does not at least break even on its automotive operations.

"If Standard & Poor's came to believe that Ford was not on a trajectory towards meeting this objective, the long-term and short-term ratings would be reassessed," analyst Scott Sprinzen said in the report, which echoed a statement last October.

For long-term debt, Ford is currently rated BBB, one level above "speculative."

So when Ford said a couple of weeks ago that it planned to earn $1.25 billion this year and break even on its automotive business, it caught the attention of analyst Saul Rubin of UBS Warburg.

"Is it just coincidence that that is precisely what S&P expects of the company in order to avoid a further credit rating downgrade?" he wrote.

(Lower credit ratings tend to increase borrowing costs.)

Such speculation by Rubin and other analysts is dangerous talk, warned Scott Hill of Sanford C. Bernstein.

Suggestions that Ford's guidance was an attempt to delay a downgrade "boil down to or are strongly suggestive of what would almost certainly be securities fraud, if true," he said in a report.

He argues that Ford's turnaround is well under way, and that most Wall Street analysts are too slow to realize it -- "just as they failed to recognize the mass destruction going on as (former chief executive Jacques) Nasser attempted to build a sustainable castle from loose sand."

Hill says now is the time to buy Ford's stock. By the time it becomes obvious that cost cutting is working, the stock will have risen too much to be an attractive buy. Ford shares gained 10 cents, or 1.1 percent, Tuesday to close at $9.57.

So far, S&P appears inclined to give Ford the benefit of the doubt. But it is keeping a close eye on automotive operations, especially in the all-important North American market.

But that will be difficult, especially since the Dearborn automaker may not make as many cars and trucks this year as it did last year, when it was rebuilding its inventory after Sept. 11, 2001.

After the terrorist attacks, Ford idled several plants. Then when it was drawn into a 0-percent financing battle with General Motors Corp., it drained its dealers lots.

J.P. Morgan Securities auto analyst David Bradley estimates the automaker made 190,000 cars and trucks last year just to rebuild that inventory.

Since automakers book profits as soon as vehicles are on their way to dealerships, the added inventory improved Ford earnings by 40 cents per share, or about 85 percent of the 47 cents per share Ford earned in 2002, he said.

"It was basically an inventory windfall for Ford."

The impact for Ford was more than for GM and the Chrysler Group combined. They benefited from increased production of about 90,000 apiece, Bradley estimates.

My first car was a 67 Mustang Coupe, 2nd one was a 67 Cougar XR-7, 3rd one was a 66 Mustang Coupe. Why did I get rid of these cars for ? I know why, because I'm stupid, stupid, stupid.

My next Ford.....
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