Ford Motor Company
Re: From GM board, If GM fails, Then What?

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By TAR12
April 25, 2006

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My thesis for buying F was that it would be hit, and hit hard by the market prior to the Way Forward and the reduction in capacity. I think F can make money in three years, assuming no significant changes in pension law or immediacy of liabilities due, and some good old American patriotic buying. So, F looked good to me last year, and 6 months ago, and last week. Now, I'm starting to wish that I waited in buying until today.

As to GM's bankruptcy posturing, remember, GM is not F. GM has an incentive as a business to pursue and to threaten bankruptcy to gain labor concessions and attempt to ameliorate pension liabilities. F does not - its a different game with different decision-makers and completely different stakes.

Bankruptcy. As I understand it, bankruptcy results in three outcomes for current shareholders. The first is the company does not survive and all is lost. That is what we typically think of as bankruptcy, but being a legal device, there is nothing typical about it. The other two outcomes for shareholders, if the company is to survive and is not shut down and liquidated, result in one positive and one negative result for shareholders. Those outcomes are one, the stock is dissolved and new shares are sold. That is the bad one. The second is that the company is in reorganization for a few years, gets out of significant liability, and the original shares retain their ownership interests. If the company can survive, then the shareholders can come out with something and with hope.

Chrysler made it through bankruptcy and so did their shareholders. Kmart did it as well, the first time. The second time, not so good. Kmart's first foray into bankruptcy provided a very positive outcome for shareholders and those with the guts to buy, then again that was the classic Lynch asset play - the real estate was valued twice what the shares were selling for and the liabilities could be paid. The first round out of bankruptcy for Kmart saw a triple in 6 months after the reorganization approval and a continuity of shares. The second was a nightmare. (The third was staved off by the purchase - merger with Sears.) Those analogies are offered for the outcomes only - I know Kmart is not an auto manufacturer and I know that Chrysler 25 years ago was different. (But how different?)

As to GM and F, I believe that the real problems in their current financial situation are two-fold. (I know there are many, but I'm being general about the two that I believe are foremost in terms of the companies both surviving.) First, the mounting future liabilities -not the pension per se, but the unforeseeable rise in health care costs to those pensioners. Ouch. Talk about a problem - the more you spend on healthcare, the better it is for the recipient-- he or she gets to live longer to get new medical problems that cost even more in the future. Again, ouch. Who would've thought that was going to happen? Seems so logical, doesn't it, now. This is the proverbial straw that can eventually break the camel's back, not just for GM and F and the UAW etc., but for all of us. But that is another thread and one that is beyond the control of either company. So, I will assume that if that battle is lost in the long run, we are all lost and try to deal with my thoughts on the other major problem.

Within the control of the auto industry [is] the ability to gain market share. F and GM have been really critiqued in their perceived recent inability to stay ahead of the curve on the market over the last few years. Looking back, didn't we all see the demise of the SUV/Truck market coming if we thought about it? Sure is easy to go, yep - gas is too cheap. Can't stay that way. We are going to get squeezed. (That was sarcasm, only those environmental wacko's were predicting this right? They were right, but for the wrong reasons. Back to non-sarcastic thoughts.)

Was it deliberate indifference? Apathy? Who knows what it was, but if gas was cheap we were buying big. Why didn't GM and F see it sooner than later and make plans accordingly? (Oops, maybe a little sarcastic there.) That we will never know. And this inability to stay ahead of the curve is the real problem. And BTW, I don't see the competition ahead of the curve on this one either -- The Tundra and Ridgeline and the Nissan full size trucks, etc? The Subaru big SUV? They are all new in the game recently. Those companies may have cars now that people are buying -and that is the problem for F and GM, but those companies are invested in big trucks, just not to the extent F and GM are. I hope they take a bath and when the market cools and the real SUV / Truck buyers replace their current vehicles and remain loyal to Ford and GM. But the point is made hopefully: The entire auto industry in North America was caught flat-footed in the current shift brought on by the latest gas spikes. Maybe gas prices have come too fast and too quickly and the industry thought it had a few more years to deal with it. Turns out they didn't. (Does anyone think we will see a meaningful reduction in fuel prices in the next three years?) Now, the question is, can Ford stop the bleeding in the car division in the next three years and be in a position to be profitable? I believe Ford can, but GM won't.

If GM can shirk their liabilities, dump the pensions ala the airline industry moves recently through bankruptcy filings, and dump some divisions, they will. Ford won't. For the foreshadowing of the initial tactics, and a preview of the political rhetoric, just look no further than Delphi and watch the opening acts unfold. What happens there will give some insight into what will happen with GM. And Ford.

But F is a different company. When you get your Annual Report in the next few weeks, read it. If you don't know, your class of stock has one vote. The Ford family shares, held in trust, have 16 votes. They get the same dividend as you. They live on that money. That sustains a few generations of family in a lifestyle they are loath to lose. GM does not have a similar shareholder obligation that would prevent a potential move into bankruptcy. (Bankruptcy has possible outcomes and once the dice are thrown, there are no guarantees.) The executives will get paid either way.

Back to the Ford situation, though. Ford can get to a near bankruptcy position, using posturing, etc. But the company will do everything to not actually have to file bankruptcy. The stakes are too high. Ford will have to go kicking and screaming, and at that point, there will be no turning back. GM, however, may intentionally go into bankruptcy to press the issues. That would let Ford see the options and give it time to act accordingly.

I have no idea how this will turn out. There is a tipping point at which the problems become insurmountable. I don't see that as happening yet. There is a point of no return, but where that is who knows. I am optimistic for Ford, they have put in place a real reduction strategy to pare production down to actual market share over the next three years. They are producing cars that people will buy. The Fusion is doing well. The Focus will do better over the next year or so. I believe that all those Expedition and F150 and Explorer owners who never needed a truck will look to Ford and give them the first chance at their first car in awhile. Ask 'em (I do.) I am optimistic, if Ford can maintain market share and pare down North American production it can become a great turnaround story. Ford still makes money everywhere else (excluding the pension liabilities) and can turn profitable quickly at least on the balance sheet with some equitable production/market share numbers.

Now, with that said, I have no idea how this will play out. I looked at the share price today and thought, is it time to put more into it. I was convinced by the end of the day to make a three-year commitment to some more shares. I'll sleep on it (and hopefully get some reasons not to in this thread!) With a depressed share price and the dividend being reinvested until the checks bounce, the return on F over the next three years could be phenomenal. For those holding at $16 /share cost basis - maybe it is time to cut and run and get some tax relief. But for a speculative play, why not be a part of the next great American social/economic drama to be staged? It always is more fun to watch the game when you've got a bet on it isn't it?

Then again, money in now can be a complete loss. And the hesitation I have today is that I can't put odds on the outcomes, yet. I think that a small investment now may be worth the risk. Of course there are always better places to put ones money-there always are. But, I believe that F can stop the bleeding, increase the market share on cars and become profitable on them with the next round of labor contracts and potential changes in the pension liabilities- remember, the truck and SUV buyers will be cycling into cars, the market will get bigger for cars, then F can become profitable. That doesn't mean they will. In addition to this, I also like the jumpstart on hybrid technology that they have gotten over GM, even if the capacity (thanks GR for that info) is not available to quickly create a product to fill the big demand the current gas crisis will bring.

Even more so, in three years, GM will have played out the first bankruptcy/near bankruptcy scenario and paved the way for the next phase of automotive manufacturing in the US. Will it end in bankruptcy, shed pensions, and/or receive direct government support? Who knows. I'm sure there will be a lot of rhetoric revolving around these issues both from labor debates to national security issues. Ford will not take the lead in this, GM will. I believe this will be a benefit for Ford - it has a different underlying corporate structure and incentive to remain a viable entity. Plus, the brand has got to be worth something on the other end even if all North American manufacturing is shutdown and Ford becomes the new "platform company"; the brand alone has to be worth a look in regard to the 13 billion market cap today's market placed on Ford.

That's what I think (and sorry for thinking so much on this) I may be willing to put some money into F in the very near future, because it may turn out to be a great turnaround story and thus very profitable, especially with that dividend buying up lots of shares.

I know this is not a great analogy because a lot has changed since the early 80's both economically and politically since then, but just look at what happened to those bankrupt Chrysler shares that were purchased for next to nothing and held for 10 or 20 years. Like I said, there is a different economic and political climate now - the economy was much worse then and America still hadn't lost its image as the industrial giant of the world. We are different now, but are we really any different? GM will let us know how different we are over the next 1-2 years.

In summary, F looks like a "bet" that may be worth making to me. With money that I can afford to lose - for good. But that would be speculation at this point. There are too many variables outside of Ford's control with GM, Labor, and a government response to call a purchase of shares in F an "investment" yet.

With that, I for now am long F with what I've got, and considering more.

T. Allan

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