Has Ford's Share Price Hit the Ceiling?

Ford CEO Alan Mulally. Photo Credit: Ford Motor Company.

This year has been kind to Detroit's Big Three automakers. Ford (NYSE: F  ) has seen its stock price soar nearly 90% over the last 12 months, and both General Motors (NYSE: GM  ) and Ford have reported two solid quarterly earnings reports as sales continue to climb during the auto industry's rebound. As Ford prepares to export its success overseas for a new growth story, the future looks bright for the Blue Oval – so why are insiders selling?

We're only two weeks into August yet more insider selling has taken place this month than in any other in 2013. In fact, there were more shares sold by insiders in August than the rest of the months combined – three times more! Of course, this doesn't mean that we have to sound the panic alarm because there are plenty of reasons for insiders to sell shares; it doesn't automatically mean that the stock's about to take a downturn.

There are many reasons to sell, but there's only one reason to buy: If insiders believe the stock price will continue to move up. Unfortunately, for investors hoping to see many Ford executives pile into the stock after a strong first half of the year, that isn't the case. There have been zero insider purchases at Ford this year – nada.

Worry not
Even with the insider selling I don't believe there's cause for concern as a Ford shareholder. I don't think its recent price of $17 is maxed out, especially after its strong second-quarter report. Furthermore, Ford continues to make progress on the biggest problems holding the stock price back.

One of those problems has been the significant losses in Europe, which appear to be slowly turning around. Ford has improved its market share in the region from 7.6% to 8.1% despite the sales decline in the region. It's also improved its sales mix with an increase in retail share instead of fleet sales, increasing profitability.

Graph by author, information via Ford's second-quarter presentation.

In addition to the improved market and retail share, Ford has been able to trim costs and lower the amount of losses from $404 million in the second quarter last year to $348 million this year. That's also a $114 million improvement from this year's first quarter. That improvement has spurred Ford's management to announce that it expects to lose less in Europe this year than the previously estimated $2 billion. 

Losses in Europe aren't the only overhang on the stock price that Ford is attacking. Underfunded pensions have been making headlines recently and Ford definitely has work left to do – its pension plan was underfunded by a staggering $18.7 billion at the end of 2012. 

Fortunately for Ford, as interest rates rise the amount it's obligated to pay into the pension declines. Interest rates have increased slightly this year, likely reducing Ford's obligation by billions of dollars. On top of the reduced obligations, Ford continues to pay much more into the fund than required by law; it has planned a contribution of $5 billion this year. Ford has also exercised a buyout strategy this year, where it offers certain employees an option to take a lump sum. It can be a win-win situation because the employees don't have to worry about bankruptcy erasing their pensions, and Ford is able to wipe the amount off the books, enabling the company to carry less risk with a reduced pension fund value.

Bottom line
As a Ford shareholder I'm not thrilled to see an uptick in insider selling, especially with no insiders buying all year long. I'm not extremely concerned either: Ford's share price has plenty of room to increase as it continues to tackle problems facing it and improves its sales internationally. 

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  • Report this Comment On August 14, 2013, at 12:31 PM, FordMan26 wrote:

    The insider selling has nothing to do with the outlook for the company and your article is inflamatory and unprofessional/ uninformed.

    You finish your first paragraph posing the question "so why are insiders selling?" and then you fail to answer your own question. As if you are just one of many participants in an online forum and not the author of an article intended to inform readers about the state of a company.

    The author is not alone however. The same crap is happening on Seeking Alpha as well. Seems the only way these websites can get readers is by scaring people, or confusing them. Not by actually informing them.

    As several respondents on Seeking Alpha pointed out, this is just the result of stock options expiring for these Ford execs so it's 'use em or lose em', and given the high increase in stock price since they were issued, the recipients are stuck with a large tax bill that they have to pay by, you guessed it, turning around and selling a large chunck of the shares they just bought at low option prices. So without actually pocketing any cash (which is still understandable - many of these folks have probably been putting off big spending while they focus on turning around the company) these folks have to sell a significant number of shares just to cover their cost of exercising the options.

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