Lessened Bankruptcy Fears Lift Ford Shares

Despite reports that sales will be overtaken in 2007 by Toyota, analysts upgrade Ford based on new financing and new CEO

As of midmorning trading, shares of Ford Motor (F) are slightly higher for the third straight day as analysts upgraded the struggling automaker's stock, in spite of reports that Toyota (TM) will overtake Ford by mid-2007 in terms of sales volume. The optimism seems to be due to diminishing concerns that Ford will have to file for bankruptcy protection, its recent cash infusions, and even a certain amount of bullishness over some of the company's new products and new chief executive officer.

On Wednesday, KeyBanc's Brett D. Hoselton upgraded the Dearborn (Mich.)-based company to "Hold" from "Sell." The previous day, Jonathan Steinmetz of Morgan Stanley (MS) upgraded Ford to "Overweight" from "Equal-Weight." Steinmetz said his upgrade is based on Ford's enhanced liquidity for use in its restructuring, signs of real urgency at the automaker, sustainable cash flow, major cost-cutting progress, and new product plans Ford has recently been making public.

In a tepid endorsement, KeyBanc's Hoselton wrote, "Although fundamentals are unlikely to show any meaningful improvement in 2007, the rapid deterioration in earnings witnessed during 2006 should begin to taper next year." It's not all good news from Wall Street, though. Bank of America (BAC) maintains a neutral rating on Ford, and cut its price target from $8 to $7.

Ford shares closed at $7.33 on Wednesday. At press time they were up 0.41% to $7.36.

No Sure Thing

Until recently, there were real concerns whether Ford had enough cash going forward to handle some 35,000 employee buyouts, as well as a new product plan that's key to restoring profitability. Ford, though, recently completed a $23.5 billion recapitalization offering that is in part secured by hard assets, including buildings, tooling, and intellectual properties. It was an unusual, but necessary, move driven by new CEO Alan Mulally. Ford expects it will require $17 billion in cash from 2007 to 2009. The automaker lost $7 billion during the first nine months of this year and has said it does not expect to return to profitability until 2009.

Make no mistake, Ford's comeback is not a sure thing. "We have no margin for error," says Ford's President of the Americas, Mark Fields. Fields says the automaker's market share, which is 16.5% through November of this year, will likely fall and stabilize at about 14%. Just 11% will be sales that Ford makes to retail customers, while the other three percentage points will be to corporate and car rental fleets. Ford's market share in November was just 13.9%.

At the heart of Ford's falling market share has been an over-reliance on trucks and sport-utility vehicles while those vehicles have been falling out of fashion with many consumers, and too few compelling and attractive passenger cars and crossover SUVs. It is trying to rapidly make over its lineup. But it will take time. It takes Ford at least four years to bring a new vehicle to market from conception to showroom.

A Showroom Makeover

Ford has a new Edge crossover hitting dealerships now, along with a Lincoln crossover. And it has beefed up the engine offering in what has already been a successful trio of cars—Ford Fusion, Mercury Milan, and Lincoln MKZ. But several badly needed models won't be arriving until 2008 and 2009, including a small car, a slickly designed Fairlane crossover SUV, a second Lincoln crossover, a replacement for the Ford Explorer that is lighter and more fuel-efficient than the current truck-based Explorer, and the new F-150 pickup.

Ford says its showroom will be 100% new, compared with today, by 2010—no mean feat since Ford has many more vehicles to replace than Toyota, and will do so with far less cash from profits. Steinmetz said an improved Ford could yield a share price of $12 to $15 by the end of 2010. He said the risk of bankruptcy over the next two to three years is low.

Ford has been a truck-centric company for too long, and that strategy has caught up to it. At one time, it had two factories dedicated to producing Explorers. That one vehicle generated huge profits for Ford Motor and became the best-selling SUV ever, with more than 5.7 million units sold. In 2000, Explorer's best sales year, Ford sold 445,157 of them, which, along with the equally profitable F-Series pickup, contributed to net income of $3.5 billion.

Paying Its Own Way

That year capped a five-year streak when Ford had cumulative earnings of more than $24 billion. Ford's finance department became so enamored with pushing trucks and big SUVs while gas prices were low that the company shorted investment in passenger cars and improvements in productivity.

Ford's high costs of labor and manufacturing have long made profiting from building passenger cars impossible. It's that out-of-date cost structure that Chairman Bill Ford and CEO Mulally have been attacking. "Every vehicle we bring out needs to pay its own way, and it hasn't been that way for some time," said Ford in a recent interview with BusinessWeek. To that end, the company has identified 16 plants for closure.

Profits, even slim ones, won't surface until 2009. And that's only if Ford does everything right. That would make for an eight-year turnaround execution for Bill Ford. Still, the upgrades from Wall Street are recognition that the automaker is moving in the right direction, and that the combination of Ford, Lincoln, Mercury, Jaguar, Volvo, Land Rover, and Aston Martin must be worth more than Ford's current market capitalization—a paltry $14 billion.

Before it's here, it's on the Bloomberg Terminal.