Are You Crazy To Buy Ford Stock Right Now?
Let me ask you a simple question… Is now the time to buy Ford Motor stock? Think about it for a moment. Ford is trading at just over $2.50 a share. That’s an 83% discount from its high price just five years ago. The car market is in turmoil, and the Federal Government just announced another round of financial assistance for the industry.
Is this a great deal, or just a money pit to throw your hard earned dollars down?
My answer might surprise you. But first, why am I asking this crazy question?
This morning I was driving into the office. I had one hand on the steering wheel and one around my morning cup of coffee. It was just like any other ordinary day… Then the news report started.
I was shocked at what I heard. UBS research analysts had initiated coverage on both Ford (F) and General Motors (GM). For those of you who don’t know, initiating coverage means an analyst is starting to cover a company on a regular basis. It’s an opportunity for the analyst to impress the big institutional money managers with their analysis and conclusions.
The shocking news wasn’t that they were starting to cover the company. Nor was it shocking they rated GM a “SELL”.
What shocked me was rating Ford a “BUY”.
My first thought was, Are they insane? Were they kidding? This had to be a joke!
But they were serious.
Business has been really tough in the auto industry. In December of 2008, sales were down 38%. Sales fell 34% in January 2009, and 41% in February! The industry is going on 16 straight months of declines. Nobody wants to buy a car these days.
Not helping the auto industry is the credit market. Credit is tougher than ever to get these days. Even if you wanted to buy a car, financing isn’t often available. Needless to say, the auto makers are losing money, a lot of money every day.
Is there positive news anywhere? If you look closely, there may be a silver lining to the dark cloud.
First and foremost for Ford is news they’re conducting a debt restructuring. Simply, they’re trading the debt they owe for stock. This cuts down on their interest payments and gives them breathing room. In total, the company’s looking to swap out just over $10 billion in debt, or about 40% of their total burden.
So, the creditors are giving a little. How about the unions? Normally one of the tougher groups to negotiate with, this time around, they’re being helpful. Union workers are agreeing to a wage freeze and a cut in benefits. These huge cost reductions should help Ford return to profitability much sooner than later.
All of these moves are helping restructure Ford to be more competitive. Best of all, they’re much better positioned on the financial liquidity issue. What do I mean by that? Simply they are at less risk of running out of money when compared to the other two big auto manufacturers.
That’s not a small issue.
Ford is the only US automaker to reject financial assistance from the US government. Because of this, potential car buyers are flocking to Ford as their number one choice. I guess it’s true everyone loves a winner! Clearly the constant pleas for bailout from GM and Chrysler are hurting the company (and rightfully so).
And that’s what got me thinking about Ford as a big winner. Think about it. Is the auto industry really going to disappear from the US? No, of course not. So if you’re betting on an eventual rebound (maybe 3 to 5 years from now) you definitely want to be invested in the strongest company out there. And right now that looks to be Ford.
That’s not the only reason.
A big area of concern was the survival of the auto suppliers if the big auto makers face a shake-up. In other words, what happens if one of the “Big Three” goes bankrupt or gets liquidated?
This is where the recent government actions mitigate the fear.
This week, the White House announced $5 billion in aid to the auto part suppliers network. They will guarantee payment for delivery of parts to the major auto makers. This action comes on the heels of more than 40 auto parts suppliers filing for bankruptcy. It gives the entire industry a lifeline of support, and that will help.
The risks of Ford’s moves.
What Ford is doing is not without risk. By converting debt and making some healthcare payments in the form of stock, the company is facing dilution. Big dilution. This will obviously impact the value of today’s common shares. Nevertheless, I see the moves making Ford a healthier and more profitable company in the long run… and nothing says once they return to profitability they can’t buy back their shares.
And that leads to my shocking admission.
After further thought, I think Ford might indeed be the big winner in the industry. Although buying shares here is still a big risk, if you look at this investment like a lottery ticket, you might end up with a big payout in a few years! It’s worth a closer look…
Category: Stocks
