Re: U.S.A.:S&P says may cut Ford, but junk rating unlikely
By Katie Kerwin
Another Jarring Bump for Ford
S&P's credit downgrade wasn't unexpected. It does, however, highlight just how dicey the carmaker's prospects are right now
The surprise in Standard & Poor's Oct. 21 notice putting Ford Motor on CreditWatch with negative implications wasn't that it happened, but why. S&P had warned it would review Ford's credit status if the carmaker didn't stay on track to meet its 2003 goal of breaking even on pretax automotive earnings, excluding special items. Many auto analysts have been expecting a ratings downgrade for months, perhaps even to junk-bond status (see BW Online, 10/21/03, "S&P Puts Ford Ratings on CreditWatch Negative").
That's unlikely to happen. Ford (F ) had good news on Oct. 16, when it beat Wall Street's third-quarter expectations with a $25 million net loss, vs. $326 million a year earlier, and raised its full-year 2003 forecast for operating profits from 70 cents per share to a range of 95 cents to $1.05 per share, or as high as $1.9 billion, vs. last year's loss of 47 cents, or $872 million.
S&P auto analyst and managing partner Scott Sprinzen doesn't doubt Ford will hit its 2003 target, thanks to aggressive cost-cutting. The trouble is, he sees little hope that its performance can show much improvement next year. Ford stock dropped slightly, to $12.17 a share, on Oct. 21, when the S&P notice was issued (Standard & Poor's and BusinessWeek Online are both units of The McGraw-Hill Companies).
"REAL PROGRESS." Ford Chief Financial Officer Don Leclair says he's disappointed by S&P's decision. "Ford Motor Company has made significant progress this year," he says. "We're making real progress cutting costs, building relationships, and launching great products. We've accelerated our response to difficult market conditions in many parts of the world." He also notes that Ford has "exceptionally strong liquidity at more than $75 billion" of cash and untapped lines of credit (see BW, 3/31/03, "Can Ford Pull Out of Its Skid?").
S&P holds a similarly bleak view of prospects for DaimlerChrysler (DCX ) and its partner, Mitsubishi Motors. S&P downgraded Daimler to BBB from BBB+, citing "the increasingly clouded prospects of the Chrysler Group amid intensifying competition in the North American auto market." This downgrade was hardly a shock, either, coming on the heels of Daimler's Oct. 21 report of a $1.9 billion third-quarter corporate net loss and a 52% drop in Chrysler's operating profit, to $171 million.
Daimler contends that Chrysler may still turn a small operating profit in 2003, but S&P calls that "highly unlikely." Mitsubishi was downgraded to B+pi from BB-pi, reflecting credit losses and deteriorating North American sales performance. S&P affirmed its BBB rating with a negative outlook for General Motors (GM ), though noting its improving competitiveness.
WIDESPREAD WOES. Not everyone shares S&P's pessimism about the auto industry. Burnham Securities analyst David Healy thinks the downgrades are coming just as business is perking up a bit. He notes that carmakers' results for the first nine months are generally higher than a year earlier. "Ratings agencies tend to be 6 to 12 months behind the real world," Healy says. "Maybe they're slamming the barn door after the horse is stolen."
S&P's reasons for gloom about Ford are all over the map -- literally. In North America, Ford faces crushing price erosion that Sprinzen expects to continue. Even its financial operations, mainly Ford Credit, which are providing nearly all of Ford Motor's earnings this year, probably can't sustain that level of profitability, Sprinzen writes. Ford's European luxury brands, the Premier Automotive Group, are expected to get back in the black this year, but "earnings improvement after this year will be gradual," Sprinzen writes in his credit report. Brazil continues to drag down its South American results.
Worst of all is Ford's "dismal performance in Europe," Sprinzen adds. Despite a series of restructuring actions since mid-2000, the operation continues to bleed red ink. He estimates Ford of Europe will lose about $1.2 billion this year, before special items, which include a third-quarter $56 million charge and a recently disclosed additional charge of $550 million to $600 million for a new round of restructuring.
"History does not offer much comfort about the ultimate success of these efforts," Sprinzen concludes. "Ford has not generated meaningful profitability in Europe for years."
NOT OFF THE CHARTS. The only good news for Ford investors is that Sprinzen says it's "highly unlikely" that Ford's rating, currently BBB, will fall below investment grade. That implies the worst that can happen in the final review, expected to be completed in four weeks is a one-notch downgrade to BBB-, the lowest rating above noninvestment grade.
Although S&P says Ford's cash flow has been weak this year, the balance sheet overall remains fairly healthy, with $18 billion in cash on Sept. 30., and little near-term debt maturing. Ford investors might want to buckle their seat belts and hold on for the ride.
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.....