It's been a great year for Ford (F +0.29%) as it continues to write one of the greatest business turnarounds in recent history. Because I mainly cover the automotive industry for The Motley Fool, I sometimes have a little extra insight into specific issues that many great analysts overlook. I'm reminded every now and then that misconceptions regarding the stock still remain, and I'm here to help enlighten you about two of them: Ford's debt, and fleet sales.
Ford's debt problem
Quite often I hear that Ford has too much debt to be considered a valuable investment, and this statement is really off base. Most people quickly assume that Ford's debt is sky-high compared with rival General Motors (GM +1.65%) because the latter was allowed to wipe billions of debt off its balance sheet during its bankruptcy. While GM did purge itself of billions of debt, that isn't the reason for Ford's massive debt figure.
Ford's credit division is responsible for the majority of the company's overall debt, which exceeds the $100 billion mark. Ford's automotive debt, which is debt from its auto operations, is what you should be looking at when comparing debt levels, and it sat at $15.8 billion as of June 30. That's a night-and-day difference, and it gets better: The large sum of debt remaining under Ford's credit division is making a ton of money for folks at the Blue Oval.
Ford Credit takes on huge loans at low interest rates and dishes the money out to consumers who finance their purchases through the company, giving Ford a solid profit from the deal. Last quarter, Ford Credit raked in a pre-tax profit of $454 million, and for the full year of 2012 it reaped $1.7 billion. Europe has been the biggest drain on profits for the company, but consider that Ford Credit actually makes more money than Europe loses. That's a huge difference from analysts' belief that Ford's large debt figure is solely from restructuring the company during the recession.
Ford's Fusion has been a big hit with consumers. Photo credit: Ford.
Currently, Ford can hardly produce enough of its Fusion or Escape models to keep retail dealerships stocked; there's no need to sell them to fleet customers. The demand is so high it has enabled the Fusion to sell at a $1,176 premium to the industry average and a $2,378 premium to the market-leading Toyota Camry! In addition, as the construction industry begins to improve, more commercial fleet sales are F-150s, Ford's most profitable vehicle.
Fleet sales
When most investors discuss Ford's fleet sales, it's treated like an infectious unprofitable disease that accounts for 30% of sales -- and again, that's far from the truth. Sure, there was truth to it a decade ago, when Ford had to produce a ton of extra vehicles to keep its plants at a high enough capacity to break even and was forced to sell these vehicles in masses to fleet customers. That isn't the case today, because of one big reason: People actually want to buy Ford vehicles!
What you don't want to see in fleet sales is a big increase in rental sales -- which are generally less profitable and can reduce residual value on the vehicles -- and Ford has avoided that problem. When you break the fleet sales into categories through August, only 12% were from rental sales in the U.S. market. The good news continues, as the trend is similar in Europe. Ford has reduced its rental sales by 10 percentage points while improving its retail sales.
Bottom line
Ford is no longer the Detroit automaker that's churning out thousands of vehicles no one wants to buy. It's also no longer a company saddled with excess debt, even though some analysts don't realize it. Ford is in better financial shape than it has been in roughly a decade and is on the road to a brighter and more profitable future.
