Rarely do I read a piece about Ford (F 4.97%) and get completely caught off guard, and feel the need to voice my respectful disagreement – but the time is here. I'll summarize what surprised me to show you the basic bear argument, and then debunk it point by point with explanations.
Fundamental basis
If I can sum up the bear argument, it basically says that Ford isn't what it used to be and its dwindling cash pile combined with enormous $105.06 billion in debt – while still increasing – make for a terrible combination.
My response
Oh boy, I'm not sure where to start with this one. Firstly, part of that statement is correct – Ford is indeed not the same company it used to be. That is a large reason why we have recently witnessed the stock increase from its 52-week low of $8.82 to briefly topping $16 recently. This is certainly not the company that refused to acknowledge changing consumer tastes and burned through massive amounts of cash incentives to move its low-quality vehicles. That's of course not how the author of the bear argument meant it – but I'm quite positive Ford is in better shape than it has been in over a decade and has brighter days ahead.
Secondly, the part about debt worries me as an analyst, as it's often misunderstood. The bear argument is shallow and flawed – it didn't take the time to dig in and explain that the majority of Ford's $105 billion in debt falls under its Ford Motor Credit finance division. Ford's debt is often glanced at and labeled as $105 billion of bad debt. In reality Ford Motor Credit takes massive amounts of loans and dishes them back out at higher interest rates, making a healthy profit – $1.7 billion in pre-tax profit last year to be exact. Ford Motor Credit accounts for roughly $88 billion in Ford's total debt, but its actual automotive operating debt is about $16 billion – a night and day difference from the $105 billion lump sum. For a representation of how Ford has handled its long-term debt over the years, which the bear argument avoided, look below.
Numbers from Morningstar.com
Thirdly, it's time to tackle the bear argument about the dwindling cash pile. At first glance it's right, the cash and cash equivalents did decrease. However, the way it's argued is incomplete, and nearly irresponsible. Take a look at this graph showing the cash and cash equivalents that the bear argument focused on, as well as marketable securities, which both combine for Ford's automotive gross cash.
Numbers from Ford's 10-K, Liquidity and Capital Resources
Now that it's put in context in a time frame of recent years, the dwindling cash pile that the bear argument covered – the blue line – doesn't look so drastic now does it? Not only that, the other parts of the equation that go into gross cash sing a different tune. To put it bluntly, you have to consider marketable securities as cash because they are highly liquid assets that Ford can count on for unanticipated cash needs. When looking at the whole picture, Ford's cash levels are fine, and improving.
Another aspect that the bear argument didn't mention: Ford's free cash flow has declined over the last three years in part because Ford is investing heavily in China to secure its future growth – cash well spent. Ford is years behind rival General Motors (GM 1.27%) in China and plans to double its market share in the region by 2015 – this move won't come cheap. As an investor, I would much rather see cash flow decline for worthy reasons than to have the cash sitting there.
Bottom line
Ford isn't the same company it was 10 years ago, and that's a good thing. It's making more popular and valuable vehicles today, and is in much better financial condition. It didn't take a government bailout to turn the ship around; rather, Ford did so with private loans which it has since paid off. When Europe stops bleeding cash and China's investments come to fruition, look for Ford stock to be a winner in the automotive industry – if it isn't already.
