Ford: Investment Grade Once Again
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Vehicle sales at US automaker Ford (NYSE: F) in March rose a healthy 5 percent to the strongest level in five years as it seems consumers like Ford's improved line of more fuel efficient cars and trucks. Strong sales so far this year have led to expectations in the market for Ford's revenues in the first quarter to climb from $31.1 billion in the year-ago period to $31.5 billion.
Success in the showroom is paying off in other ways for Ford also. It just regained its investment grade standing from ratings agency Fitch, with a one-notch upgrade to triple B minus. Fitch had stripped Ford of its investment grade rating back in 2005. This upgrade marks another step in the turnaround for the company, beginning in 2006, engineered by CEO Alan Mulally.
Thanks to a $23.4 billion loan, which closed before the credit markets in effect shut down in 2008, Ford was able to sidestep Chapter 11 bankruptcy and avoid a US government bailout. This is in sharp contrast to its two US rivals, General Motors (NYSE: GM) and Chrysler, which is now majority owned by Italian carmaker Fiat S.p.A. ADR (NASDAQOTH: FIATY.PK). Avoiding taking money from taxpayers no doubt won Ford some fans at the expense of both General Motors and Chrysler.
And Ford is quite a turnaround story. By the end of 2011, Ford had reported profits for 11 straight quarters after efforts headed by Mr. Mulally to cut costs (while protecting spending on product development) and streamline operations by selling Ford's premium European brands and its stake in Japanese automaker Mazda. This year the company also reinstituted its dividend after more than a five-year hiatus.
Fitch did cite management's focus on increasing profitability, raising liquidity, lowering debt and reducing the company's pension costs as reasons to be optimistic about Ford's ability to withstand the headwinds facing the entire global auto industry. The headwinds facing all vehicle makers include rising fuel costs, a European recession, a still sluggish US economy and a potential for a marked slowdown in sales in emerging markets such as China, India and Brazil.
These risks are still very real despite a very successful first quarter of 2012 for the US auto industry. Sales are currently on track to surpass 14 million vehicles this year. If that happens, it will be the strongest level since 2009. Even with those outstanding figures, the US will still trail China as the number one vehicle market.
Regaining its investment grade rating will help Ford in several ways, including lowering its borrowing costs and retrieving its collateral. Back in 2006, in order to receive the $23.4 billion loan, Ford had to pledge its major assets (even its blue oval logo) as collateral for the loan. However, the assets won't be freed until two of the ratings agencies gives Ford an investment grade rating. So Ford will have to wait until either Moody's or Standard & Poor's takes positive action on the company. Its competitors, GM and Chrysler, are still rated junk by all the rating agencies and are likely to remain so for the foreseeable future.
Will Ford receive an upgrade from one of these other rating agencies? Yes, and probably in the near future. As Fitch analyst Steve Brown said, “Ford's credit profile is now durable enough to maintain investment grade ratings even through a downturn.” And as long as Mr. Mulally is at the wheel, Ford is likely to continue to outpace its US rivals.
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