US:New signs of trouble for Ford
New signs of trouble for Ford
Second-quarter results out today
SARAH A. WEBSTER
DETROIT FREE PRESS BUSINESS WRITER
While the financial situation at General Motors Corp. seems to be taking a turn for the better, crosstown rival Ford Motor Co. might now be on the cusp of its most challenging period yet.
Ford is scheduled to announce today its financial performance for April-June. The automaker could lose as much as $130 million or make as much as $388 million, according to 15 analysts who gave their estimates to Thomson One Analytics financial service. The average second-quarter estimate is 12 cents a share, or a profit of $222 million.
But the more pessimistic forecasts indicate entirely more extreme scenarios for the 103-year-old family-run automaker.
The credit-rating agency Standard & Poor's recently characterized Ford's challenges as "massive." It may sound crazy, but one automotive analyst is predicting that Ford could deplete its $24 billion in cash reserves by the end of next year. And some experts publicly discuss whether Ford can survive long term, especially if competitor GM joins forces with Renault SA and Nissan Motor Co. Ltd.
Ford representatives declined to comment on analysts' assessments, saying the company does not forecast its financial performance. But company officials stressed progress made in the early stages of the Way Forward plan, which aims to restore the company's North American auto operations to profitability by 2008. The plan includes eliminating 34,000 jobs and closing 14 plants by 2012 and developing new, bold products.
"Many people question the viability of Ford," Maria Bartiromo, host of CNBC's "Closing Bell," said in a recent interview with Carlos Ghosn, chief executive of Renault and Nissan. "Is Ford in deep trouble...?"
Ghosn didn't directly answer the question, but the difficult realities seem apparent to many industry watchers.
Is turnaround plan working?
On Wednesday, Ford shares closed at $6.33, down 11 cents, on the New York Stock Exchange. That may not be such a surprising performance, given that no automotive analyst recommends buying Ford stock, according to Bloomberg. Rather, 12 recommend selling it and seven suggest holding onto it.
Ford is only about six months into the Way Forward plan. But the market is getting tougher by the minute, with conflict in the Middle East drumming up even more concern over rising gas prices and expediting the consumer shift into less-profitable cars and crossovers.
Although Ford posted a $2-billion profit last year, the automaker lost $1.2 billion in the first quarter this year, and the second-quarter performance to be released today isn't expected to come close to the $956 million Ford earned during the same period a year ago.
General Motors, meanwhile, has made substantial progress in its turnaround plan, winning confidence on Wall Street as it has swung from a $10.6-billion loss last year to a first-quarter profit. That's a switch from last year, when Ford appeared to be the company in better shape.
Last week, Ford also signaled that more cuts might be coming when it unexpectedly slashed in half its dividend to shareholders and the fee it pays to board members -- a move that could save Ford $400 million a year. That is a marginal figure in Ford's heavy ledger book, but many viewed it as a symbolic gesture.
GM made similar cuts earlier in the year as part of its own North American turnaround.
"We do not think a dividend cut would be as necessary if Ford was making good progress on its Way Forward restructuring plan," Robert Barry, an analyst with Goldman Sachs, said in a report to clients. "It has been our view that this goal is ambitious and unlikely."
There are other signs Ford is in trouble.
Halfway through the year, sales of Ford vehicles are down 4.1%, though sales of Ford cars are up for the year. That means all of those lost sales were in the truck category, where the automaker makes most of its profit.
What's more, Ford's spending on truck incentives, such as cash-back rebates and other discounts to entice buyers, has increased by more than $500 a vehicle through June. The automaker spent an average of $4,265 to sell every pickup, SUV or van. Only the Chrysler Group had higher truck incentives.
Despite these headwinds, Ford is expected to end the year with a profit of 35 cents a share, or $658 million, according to analysts who report their estimates to Thomson One.
Analyst's dire prediction
But on Wednesday, David Healy, an automotive analyst with Burnham Investment Research, warned the automaker's situation is far worse than most people believe.
"Nobody knows how bad the situation really is," he said.
Healy expects Ford to lose $1.16 a share -- about $2.2 billion -- this year and as much as $3 a share -- or $5.6 billion -- in 2007.
"The implications for Ford's operating cash flow," his report said, "are riveting: a cash burn of $10 billion in 2006 and another $14 billion in 2007!"
Healy said he based his estimate on:
Ford's short-term product pipeline. Last week, Merrill Lynch estimated that, among major automakers, Ford would have the oldest lineup of vehicles in its showrooms, with an average vehicle age of 3.5 years.
The fact that consumers continue moving away from profitable trucks into less-profitable cars and crossovers.
Ford no longer has a profit contribution from the rental company Hertz Corp., which Ford sold last year for $5 billion.
In an interview with the Free Press, Healy acknowledged that his peers don't share his dire predictions.
"I'm saying the rest of the world is crazy, or they're sane and I'm crazy," Healy said. "I'm publishing these horrible numbers because I believe they're true."
Healy said that he actually has confidence in Ford's Way Forward plan.
The problem, according to Healy, is getting to 2008. Between now and then, Healy said, Ford will struggle to meet its financial obligations, which will strain operating cash.
'A number of things' to worry about
Ford has not given any indication of that, however. Chief Financial Officer Don Leclair has said repeatedly that the company aims to end 2006 with a cash balance "in excess of $20 billion."
At the end of 2005, Ford had $25.1 billion on hand. The company has burned through about $1.4 billion of that this year, ending March with $23.7 billion on hand.
While some experts agreed that Ford is entering a more challenging phase, they could not envision Ford burning through all that cash so quickly.
"That could happen, but it would be hard," said Peter Morici, former chief economist with the U.S. International Trade Commission. "I don't think they're going to run out of cash."
Robert Schulz, an automotive analyst with Standard & Poor's, said he thinks Ford will end this year with plenty of cash, but he would not talk about 2007.
"We haven't really said much about that publicly," he said. "Clearly, there are a number of things to be worried about."
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.....