Ford's Huge Debt Problem

There is a huge problem with Ford's (NYSE: F  ) debt, but it isn't with the debt itself. Rather, it's with the average investor completely misunderstanding Ford's debt number. Nearly every day I'm reminded how many people out there still believe that Ford has $100 billion in automotive debt. That is false! It makes me shake my head and sigh. So here I am trying to spread the word and squash the misconceptions about Ford's debt. I'm also recruiting you all to help the world invest better by reminding each person you see that the majority of Ford's $100 billion is making Ford extra money! For those of you who aren't sure what makes up the $100 billion, please read on.

Automotive debt
At the end of the third quarter in 2012, Ford's automotive debt sat at $14.2 billion. That's the number that needs to be brought up when discussing debt from company operations. Sometimes a little knowledge can be dangerous. In this case, investors doing their due diligence and opening up a 10-K can read through the long-term debt numbers and then reflect that they can't invest in a company with so much debt. The fact of the matter is that people don't know what they don't know. There isn't a little asterisk that directs one to a note stating most of the $100 billion is under Ford's financial division. 

Financial division
Ford's financial division is unlike anything found in its competitors. It takes on huge loans at low interest rates and dishes it back out to consumers at higher rates, then takes in a fair profit. If you follow the auto industry then you know how much doom and gloom is talked regarding Europe's vehicle sales. Companies are losing money by the bundle -- Ford estimates it will lose at least another $1.7 billion this year. Here's something you might not know: In 2012, Ford's finance division raked in $1.7 billion in pre-tax profit on over $7 billion in revenue. That equaled the loss in Europe, yet no one mentions that! Instead, people see the $100 billion and wrongly assume it's the same old, terribly managed, Detroit company that has way too much debt. 

Debt levels are fine
While $14.2 billion is no small number, it's nothing that Ford can't handle. Consider that in 2006 Ford took on more than $18 billion in debt to help restructure the company while taking massive losses. Between 2006 and 2008, Ford managed to lose over $30 billion from its operations. Nobody wanted to buy a Ford vehicle then, nobody. Things are completely different today. The Fusion is changing consumer attitudes and the Escape is selling like hotcakes. 2013 has started off with a bang in automotive sales, and Ford is taking full advantage of it. The company was confident enough in its financial shape to double its dividend a few months ago. There are a lot of reasons to be optimistic in Ford as a company and in having its stock in your portfolio. So the next time you hear someone mention that its $100 billion in debt is too much, enlighten them, please. Thanks in advance.

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Read/Post Comments (15) | Recommend This Article (31)

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 April 05, 2013, at 2:26 PM, elevensmile wrote:

    Thank you for this article! I have replied to many ill-informed articles to point out the difference in automotive vs. automotive lending debt. This very well written article will hopefully help future misconceptions.

  • Report this Comment On April 05, 2013, at 2:36 PM, TMFTwoCoins wrote:

    Thanks for reading. Glad to hear people like you are helping spread the word, it really is a fact worth repeating!

  • Report this Comment On April 05, 2013, at 3:49 PM, SisyphusRocks wrote:

    The only thing that would have made this article better is changing the headline. It's probably Motley Fool's fault, not the author's, but the headline makes it seem like this article is about Ford having far too much debt, when the exact opposite is the case.

  • Report this Comment On April 05, 2013, at 3:54 PM, TMFTwoCoins wrote:

    I'll be honest, I'm totally guilty of doing that on purpose. Generally I make all my headlines totally fair and accurate. This time, however, I felt I could get tons of people to click for a very relevant point. The more people that understand this issue, the better.

  • Report this Comment On April 05, 2013, at 6:50 PM, UgolinoII wrote:

    Most MF headlines are exactly like that, nothing to be sorry about ;)

  • Report this Comment On April 05, 2013, at 6:57 PM, mman5513 wrote:

    It was Motley Fool who said buy @ $5 something...

    Thank you very much

  • Report this Comment On April 05, 2013, at 8:30 PM, TMFTwoCoins wrote:

    Yes, that was a rather brave call at the time. Sure did pan out though, and I still think Ford has its best days ahead.

  • Report this Comment On April 06, 2013, at 2:37 PM, GETRICHSLOW2 wrote:

    Understanding this point about Ford's debt got me to at least take a look at their stock. Overall I think it is solid. Just slightly concerned with their cash flow and the fact it is trading 8% above it's Graham number.

    I am watching it closely.

  • Report this Comment On April 09, 2013, at 9:40 AM, TMFMarlowe wrote:

    Well said, Daniel. This is a point that needs to be hammered over and over again.

    John Rosevear

  • Report this Comment On April 09, 2013, at 10:21 AM, bytheway2 wrote:

    Interesting. Some of the confusion comes directly from the accounting profession. In times past we were allowed to have unconsolidated finance subsidiaries with seperate financial statements entirely. Any parent company guarantees or notes held were footnoted. This was appropriate for the auto industry, heavy equipmen tmanufactuers, airlines etc. Idea! Why not have the captive finance co. assets and debt each identified on seperate lines when shown on the consolidated statement? This would help solve the problem and not force us into the pages of footnotes.

  • Report this Comment On April 09, 2013, at 10:36 AM, TMFMarlowe wrote:

    Ford actually does a very good job of calling out its actual debt, which it calls "automotive debt". (GM does this too, by the way.) They explain it clearly and update it every quarter with their earnings report. It's always given in the press release, and then Bob Shanks (Ford's CFO) spends a few minutes breaking it down during the earnings conference call. Every quarter.

    The problem is the folks who just look at numbers that are automatically provided by feeds in places like Yahoo Finance that auto-scrape the numbers from the 10-Ks etc, and who don't look deeper to the materials and context that the company itself presents. It's too easy to get the wrong idea.

    My experience is a lot like Daniel's -- ever since I started writing about Ford for the Fool in 2009, folks have been bringing this up. It's a point we need to keep clarifying.

    John Rosevear

  • Report this Comment On April 09, 2013, at 11:40 AM, TMFNiner wrote:

    Good article Daniel, this is definitely one of my pet peeves when people write about Ford.

    Reminds me of the skewed number that most sites displayed as Ford's P/E all last year.

    Thankfully, the $12bn tax benefit Ford took isn't in the LTM anymore. Used to drive me crazy when people wrote that Ford was trading for an 'INSANELY cheap' 2.5x earnings.

    Brendan

  • Report this Comment On April 09, 2013, at 9:00 PM, TMFTwoCoins wrote:

    Oh man, I'm with you, Niner. That was incredibly annoying! Some even went as far as to brag about the huge net income increase in the 4Q -- it hurt to read.

    Thanks for reading all.

  • Report this Comment On April 12, 2013, at 2:24 PM, cpa20000 wrote:

    Great article about Ford's debt. When I was the CFO for a large Caterpillar dealership we asked our banks to substatially increase our line of credit in the 1990's and they didn't understand why. It was simple, I explained. Our sales were rapidly increasing and receiveables and inventory level were also increasing to support this level of sales (and profits). When sales decreased the cash collected from large account receivable was used to pay down the high debt we took on.

  • Report this Comment On April 15, 2013, at 10:57 AM, SkepikI wrote:

    Easy on the Taxpayers, taking care of customers and employees, rational P/E and 3% yield, a long term investment that pays off (and pays out). Long F...what more can you want?

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