You Should Have Bought Ford Yesterday

I hate hindsight observations like this one, but here it is: Tuesday, a day that saw shares in long-shot electric-car start-up Tesla Motors (Nasdaq: TSLA  ) surge an outrageous 41%, would have been a great time to buy Ford (NYSE: F  ) stock instead.

Ford's stock gapped down on Tuesday, falling below $10 for the first time this year, after several days of declines on reports that the company was planning to make a debt payment in stock, rather than cash. Such a payment -- analysts' thinking went -- would suggest that Ford's management felt that the stock was overvalued, and was likely to fall rather than rise in the near future.

It wasn't hard to see why Ford's management might be bracing for a fall: Ford Americas' Mark Fields said last week that the U.S. auto market has "flat-lined" since the third quarter of 2009, meaning that the dramatic string of year-over-year U.S. sales gains we've seen in recent months is likely to run out soon.

Put those two tidbits together with the more general economic concerns that have been surfacing in recent days, and you have -- or at least had -- a whole bucket of Not Good aimed directly at Ford's stock price.

But then on Wednesday morning, Ford announced that they'd made the scheduled debt payment -- and more -- in cash. So much for buying Ford under $10.

Ford retires another big chunk of debt
The payment in question was a scheduled payment to the UAW Retiree Medical Benefits Trust, set up in 2008 as part of a landmark deal between the UAW and the Detroit automakers that sought to put the Detroit Three on a more equal cost footing with rivals like Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) . Ford agreed to contribute $15 billion to the trust, which is similar to trusts established by AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) to fund health care for retirees, over the course of several years.

Ford was scheduled to make payments on Wednesday totaling about $860 million on two notes held by the trust. Under the terms of the deal, Ford could have made about $610 million of that payment by issuing common stock, a move that was widely expected. But not only did Ford make the full payment in cash, the company chose to pay an additional $2.9 billion, enough to retire one of the notes.

Why this is a big deal
Why is this a big deal? First, by choosing to pay in cash rather than stock, Ford's management is making a statement of confidence in its stock's prospects -- always a good thing for shareholders. Second, Ford's retiring a big chunk of debt ahead of schedule, making a total of $7 billion of long-term debt retired during the second quarter. That's another statement of confidence, this time in the company's ability to generate cash going forward, as well as a sound business move -- Ford will save some $470 million a year in interest payments.

Third, check your calendar: Ford's management is making those statements -- and pushing a much-larger-than-necessary chunk of cash out the door -- on the last day of the quarter. You think maybe they like the way the quarter's numbers are shaping up?

But wait, there's more
Today's flurry of payments came with some additional good news for Ford investors. Ford and the trust agreed to modify the terms of the remaining note, allowing Ford to pay all or part of it off early in exchange for a discount on the total due. That could save the company as much as 5% on the remaining balance of $3.6 billion -- some $180 million.

Ford also took what might be a step toward the eventual reinstatement of its dividend, making a payment of $255 million to cover accrued distributions previously deferred on its Capital Trust II preferred shares -- about five quarters' worth. That's another bite taken out of Ford's total long-term debt -- and a nice windfall for holders of those shares.

It all adds up to a hearty statement of confidence by Ford's management. And while Tuesday's lows did represent a great buying opportunity, I'm not sure the train has completely left the station. If you've been thinking about grabbing some Ford shares, this might not be a bad time.

Fool contributor John Rosevear owns shares of Ford -- some of those Capital Trust II preferred shares, in fact, and he is definitely looking forward to the upcoming distribution. Ford is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (32)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 30, 2010, at 6:25 PM, stan8331 wrote:

    And I actually did add a bit to my Ford position yesterday. :-)

  • Report this Comment On June 30, 2010, at 6:58 PM, susan400 wrote:

    "You Should Have Bought Ford Yesterday"

    ??

    US atuo cos cannot compete witrh their legacy costs.

    Thye exist for shorting, they go down. Remove $$, by going short.

    Bold headl;ines don't win in this game they lose

  • Report this Comment On June 30, 2010, at 8:30 PM, TMFMarlowe wrote:

    @susan400: 2006 called, they'd like their analysis back.

    Put another way: Many of those legacy costs are gone now, and it turns out that Ford (and GM) can be extremely competitive when on a more-or-less equal footing with the rest of the world.

    John Rosevear

  • Report this Comment On July 01, 2010, at 9:13 AM, MadMicro wrote:

    I scooped up more Ford when it dipped below $10... this company has been doing everything right lately and the profits will tell the tale

    -MM

  • Report this Comment On July 01, 2010, at 12:17 PM, YoungDude20 wrote:

    LOVE hearing about ford possibly reinstating their dividends.. only adds to the reason why I bought F months back.

  • Report this Comment On July 01, 2010, at 2:08 PM, TMFMarlowe wrote:

    @YoungDude20: I don't think it's going to happen in the very near future, but I think it'll happen sooner than a lot of people expected -- within 2 years, maybe less.

    Thanks for reading.

    John Rosevear

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