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March 14, 2003

USA: Most analysts give Ford a fighting chance – paper

Without "a material change" in the industry's business model, General Motors and Ford face a crisis that "will involve restructuring, consolidation, or possibly even mergers with other partners," John Casesa, an auto analyst at Merrill Lynch, told the New York Times (NYT) in an interview. In a Friday article looking at the financial state of Ford and GM, the NYT noted that Gary Lapidus of Goldman, Sachs wrote in a recent report entitled "Motown Breakdown" that "the status quo may be untenable." Sean Egan, an analyst at the independent credit rating agency Egan-Jones, was even more pointed recently, saying Ford would be bankrupt if not for its blue- chip brand name, the paper added, noting that these are lean times for the Big Three, though Chrysler at least has its German parent, DaimlerChrysler, to lean on.

By bcusack

Without “a material change” in the industry’s business model, General Motors and Ford face a crisis that “will involve restructuring, consolidation, or possibly even mergers with other partners,” John Casesa, an auto analyst at Merrill Lynch, told the New York Times (NYT) in an interview.

In a Friday article looking at the financial state of Ford and GM, the NYT noted that Gary Lapidus of Goldman, Sachs wrote in a recent report entitled “Motown Breakdown” that “the status quo may be untenable.” Sean Egan, an analyst at the independent credit rating agency Egan-Jones, was even more pointed recently, saying Ford would be bankrupt if not for its blue- chip brand name, the paper added, noting that these are lean times for the Big Three, though Chrysler at least has its German parent, DaimlerChrysler, to lean on.

The NYT said the latest sign of economic trouble came from Ford, which said on Friday that it would cut second-quarter production 17 percent. War worries appear to be halting years of booming North American sales.

“It’s pretty clear that consumer confidence has slipped,” George Pipas, Ford’s top sales analyst, told the New York Times. “It may be an equal measure of concerns about geopolitical instability, prospects for conflict, and there hasn’t been much good news as it relates to jobs.”

The newspaper said that rising petrol prices – CBS News this week reported a San Diego outlet selling premium for close to $US4 a gallon – are also wearing on a pivotal Detroit profit centre, big SUV’s. Making matters worse, after a year and a half, an incentive war led by GM appears to have lost its effectiveness, while many customers now take zero percent financing for granted, the NYT added.

The NYT said Ford looks weakest right now with a bloated cost structure is bloated and its bonds trading as if they had junk ratings. The company, which celebrates its centennial in June, has lost $6.4 billion in the last two years.

The NYT also commented on “continuing turmoil in the corner offices” at Ford saying that the management team, assembled by William Clay Ford, Jr., the chairman and chief executive for nearly a year and a half, has yet to coalesce. Nicholas Scheele, Ford’s president and chief operating officer, sent a memo Wednesday to company officers that tried to squelch rumors of a rift with David Thursfield, another top executive, the NYT noted, also mentioning that Ford is currently looking for its sixth chief financial officer in four years while Allan Gilmour, retired until last year, fills in.

Though Egan told Grant’s Interest Rate Observer in an article last month, “if it didn’t have the name Ford, it would be in bankruptcy”, the NYT said that Ford does have the name Ford, and almost all other analysts dismiss talk of bankruptcy. The paper said that Ford stock got a boost Wednesday when Saul Rubin, a UBS Warburg analyst and a noted bear on Ford, upgraded the stock from “reduce-2” to “neutral-2,” in effect telling investors that Ford may be bad, but not that bad.

“While long-term prospects look poor indeed, we believe that Ford simply does not have the balance sheet weakness to support any notion of imminent bankruptcy risk,” Rubin wrote in his report, according to the New York Times, adding that while it was “a poor equity investment” it was also fairly cheap.

But others were more pessimistic, the paper said.

“The reality is that Ford is very bad,” Maryann Keller, a longtime motor industry analyst, told the NYT, adding that the company’s troubles are a holdover from the brief, but destructive, reign of Jacques Nasser, who was ousted by Bill Ford in October 2001.

Keller told the NYT that Nasser “squandered billions”, laid off the company’s older managers and let product plans stagnate.

In recent decades, she added, according to the NYT, Ford got by because it “was a little better than GM” by such measures as quality and manufacturing efficiency, and pressures on the Big Three “were largely inflicted on General Motors.”

“But now, by most statistical measures, GM is better than Ford,” Keller told the New York Times. “And the world’s largest auto company doesn’t need to be better than Honda or Toyota, just Ford.”

With a potential war looming, things could get worse, the newspaper said. “They were not making money over the last two years when auto sales were good,” Egan told the NYT in an interview. “So what will it look like over the next two years?”

According to the NYT, Egan also sees a company with total debt load of $166 billion last year versus $11.2 billion in shareholders’ equity. But David Brandi, Ford’s director of long-term financing, argued against combining Ford’s automotive debt with Ford Credit’s huge portfolio of car loans, the NYT said.

“You have two very different kinds of businesses,” Brandi told the NYT, “and there is an appropriate leverage for each.”

According to the New York Times, most analysts see Ford’s borrowing situation as ugly but under control. And there is a debate on whether GM really is in much better financial shape than Ford.

“Ford is highly liquid and it has lots of assets to sell,” Casesa of Merrill told the paper. “I’m in the camp that sees the restructuring plan as credible and achievable and exactly what the company needs, but it will take time to create results.”

“I think it’s the most vulnerable in the market right now, but from a balance sheet standpoint Ford may have more staying power than GM, primarily because Ford has a much larger net cash position and a much lower pension liability,” Casesa added, according to the NYT.

The New York Times said that part of GM’s problem is that it is the remnant of a much larger company and now supports two and a half retirees per worker in North America, compared with a one-for-one situation at Ford.

Lapidus of Goldman, Sachs told the paper that “the conventional view would be that Ford operations are not performing as well,” but he added that Ford’s “balance sheet, at least in the short run, is in better shape. There are fewer short-term calls on their cash and they have more of it,” he said, according to the New York Times.

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