Why Ford and GM Aren't as Cheap as You Think

Editors’ Note: in the below video pension and other postretirement benefits should be used instead pension contributions terminology. Pension contributions are included in cost of sales and selling and general administrative expenses and classified as net periodic benefit cost, and they are not the same as the pension items included in other comprehensive income. Simplified; as a company reports pension and other postretirement benefit losses, those are amortized over time and included in expenses. For example; Ford expects to recognize $1.6 billion of pension and postretirement benefits in 2013 as net expense. Fool Analyst Blake Bos still believes investors should pay attention to pension and postretirement benefit losses in comprehensive income given they will negatively affect company earnings over the long term as they are amortized to net benefit cost. 

In the following video, Motley Fool industrials analyst Blake Bos discusses Ford's (NYSE: F  ) and GM's (NYSE: GM  ) under-the-radar pension issues. He tells investors where to look on the balance sheets to find pension contributions, and what Ford's and GM's PEs look like once you factor this number in. Finally, he tells us which of the two companies has a bigger pension contribution burden problem, and which of the two he likes better as an investment right now.

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  • Report this Comment On March 14, 2013, at 8:19 PM, ragozza wrote:

    I worked in the pension management and accounting area for Ford and Visteon for over twenty years. It is clear from Mr. Bos' video that he does not understand pension accounting under SFAS 87 and its effect on Net Income. Subtracting pension contributions (cash) from net income -- which already includes pension expense, would result in a double count of some of that expense. It is appropriate to consider the difference between pension expense (incl. in Net Income) and contributions (cash) when projecting cash flow, (similar to the difference between Depreciation and Amortization on the one hand and capital spending on the other), but the earnings adjustment as described in the video is just wrong. Better get that accounting book out before giving further advice.

  • Report this Comment On March 15, 2013, at 1:50 PM, TMFBos wrote:

    Hello Ragozza,

    Thank you very much for the great insight. I definitely made a mistake associating pension contributions with the amount classified in other comprehensive income as they are vastly different. I should have said "pension and postretirement benefits." Don't you think an investor should factor in the losses in comp income (largely actuarial losses) due to the long term implications of larger expenses being amortized over time? For example Ford's expected amount to be expensed went from ~900M to $1.6B from 2012 to 2013. If the difference between pension obligations and plan assets continues to grow that expense will as well. Which considering Ford's expected rate of return on assets, I'd argue could be likely in the future even considering higher interest rates to discount by (lower pension obligation amount). I'd definitely like your insight into the matter as you appear to be very knowledgeable about the subject.



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