Why Ford's New Contract Is a Big Win

Consider that bullet decisively dodged: The United Auto Workers announced on Wednesday that workers at Ford (NYSE: F  ) had approved their new labor agreement with a solid 63% voting in favor.

Voting concluded after more than a week of drama that saw UAW leaders threaten a strike after some influential locals voted down the contract by wide margins. But as predicted, cooler heads prevailed -- thanks, perhaps, in part to pressure from a UAW leadership that very much wanted this agreement to pass.

The upshot for workers is pretty clear: bigger bonuses and more job security. But while those bonuses will increase Ford's costs, the company reaped some pretty significant benefits from the agreement as well -- benefits that could lead to some welcome developments for shareholders.

A solid deal for Ford, as well as workers
Ford held a short briefing for media and analysts this morning, in which executives led by Executive Vice President Mark Fields and CFO Lewis Booth presented highlights of the agreement from management's perspective. As is typical at Ford nowadays, the briefing began with a recitation of the key points of the company's "One Ford" turnaround plan, and the high points of the labor agreement were presented in the context of their contribution to the success of that plan.

The bottom line, as Fields put it, is this: The increases to worker compensation under the new contract will increase Ford's costs, but by less than 1% annually -- a similar percentage to rival General Motors (NYSE: GM  ) in its new labor agreement. Meanwhile, Ford's contract makes changes to some labor rules that will allow the company to get more production out of its plants, a "substantial profit opportunity" that should "more than offset" the increased labor costs, Fields said.

Yes, they're adding jobs and bringing work into the U.S., and the bonuses and other increases due under the contract will cost Ford about $280 million this year alone. But Booth maintained that these moves would lead to increased efficiencies and not, on balance, higher costs -- thanks to this new approach to managing labor in factories that Ford is bringing to its U.S. plants for the first time.

Getting more out of current facilities
It's a significant change, say Ford's executives. The new contract allows the company to introduce what it calls a "3 crew" system in its plants, an arrangement that allows managers more flexibility in scheduling than they would have under a standard shift system. These "alternative shift patterns," as Booth called them, will essentially allow the company to schedule plant maintenance or add (or stop) overtime work on the fly.

This, combined with some changes to the way in-plant teams are put together, will allow Ford to get more production out of its existing plants without significant increases in labor costs (in Ford-speak, to "drive utilization of facilities up to reach world-class levels," comparable to the best achieved by rivals like Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) ). Ford will also be able to more quickly respond to changes in market demand with increases or decreases in production -- continuing to focus tightly on "matching capacity to demand," Fields said, using a phrase often heard from CEO Alan Mulally.

These changes are modeled on systems that Ford has implemented in some of its plants outside of the U.S., and Ford's experience with those systems, Booth said, give the company reason to expect that implementing the changes here will result in significant increases in profitability.

A big hint of good news to come
For investors, the successful conclusion of Ford's negotiations with the UAW begs a couple of questions: Is the company nearing its long-sought return to an investment-grade credit rating? And is it nearing the resumption of its dividend?

While ratings agencies are likely to give Ford a credit upgrade soon, that upgrade may fall short of investment-grade status. And Booth and other executives have said in the past that a return to investment-grade status was a prerequisite for the resumption of the dividend. But Booth seemed to walk that back a bit today, saying that "we don't think it is an absolute necessity" to reach investment grade before resuming the dividend, as the company's performance and credit have already improved significantly.

That's a strong signal that Booth (and by extension, Mulally) feel that the company's financial performance continues to be firmly on track -- and that in turn is a promising hint of what could be in store when Ford reports third-quarter earnings Wednesday.

Let's put it this way: If you've been thinking of buying Ford stock, you might want to think about doing it sooner rather than later.

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Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On October 20, 2011, at 2:47 PM, pryan37bb wrote:

    I read the transcript on Seeking Alpha, and it seems they mentioned in the conference call that while they did say at one point that investment-grade credit must recede the dividend reinstatement, it seems the credit market was pricing Ford's debt as though it already were investment-grade, and thus they wouldn't need the upgrade to restart the dividend. Do you have any suggestions for online resources about corporate debt? I'm not sure where to find info on that, either here or at Yahoo Finance, my two favorite financial sites. I'd like to see for myself what they're talking about when they say their debt is being priced as though it's not junk.

  • Report this Comment On October 21, 2011, at 9:10 AM, TMFMarlowe wrote:

    @pryan37bb: Yahoo has a pretty good bonds section (search "Ford Mtr" from finance.yahoo.com/bonds to see current yields etc on Ford's), but in terms of short-term paper, I don't know of a good free online source offhand. I'll see what I can come up with over the weekend.

    Thanks for reading.

    John Rosevear

  • Report this Comment On October 24, 2011, at 11:32 PM, pryan37bb wrote:

    Oh, okay, there it is; I must've missed the bonds section in Yahoo when I first checked. Thanks for getting back to me!

    -Patrick

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