S&P Approval of GM, Ford Reflects Industry RecoveryKeith Naughton and Mark Clothier
Detroit passed another significant signpost of its recovery as Standard & Poor’s Ratings Services yesterday revised General Motors Co.’s outlook to positive from stable and raised Ford Motor Co. to investment grade.
U.S. auto sales surged 17 percent last month and reached their highest level since May 2007. Detroit automakers, just four years after GM and Chrysler Group LLC went through bankruptcy, are now reaping profits not seen since the turn of the century.
GM and Ford’s strong performance in their home market helped drive S&P’s decision to take positive actions on both. GM’s outlook is a sign the ratings company will probably boost the largest U.S. automaker to investment grade by the end of 2014. S&P increased Ford to BBB-, the last major ratings company to rate the carmaker investment grade.
“The North American performance has been much better than we would have anticipated,” Dan Picciotto, S&P’s primary credit analyst on GM and Ford, said yesterday in an interview. “It’s hard to understate how much cost has been taken out of the North American operations before, during and after 2008 and 2009. They’re certainly in a much better cost position.”
The U.S. automakers also have demonstrated a newfound discipline in avoiding big discounts and building too many models, sins of the past that got Detroit into trouble.
“We haven’t seen a lack of discipline as it relates to inventory and incentives like we did early in the century,” Picciotto said. “The question is, when the volatility returns, and eventually it will return, how do companies behave, how do they absorb the damage when there’s a production decline?”
Because GM and Ford have more cash and less debt, they are less likely to fall into old habits, Picciotto said.
“They have a lot of cash on the books and availability under the revolvers to borrow and they’re not heavily leveraged,” Picciotto said yesterday. “They’re in a better position to withstand the cyclicality.”
The automakers also have overhauled their lineups and are fielding some of their best cars in a generation, such as GM’s Chevrolet Cruze, with sales up 18 percent this year through August, and Ford’s Fusion family sedan, up 13 percent. Hot cars stoke consumer demand and lessen the need for discounts.
“It’s all coming from the really strong retail demand and that’s a really healthy place to be,” said Michelle Krebs, a senior analyst with auto researcher Edmunds.com. “These are all factors that add up to a really healthy bottom line, which is what the ratings agencies like.”
GM declined 0.5 percent to $36.15 at the close yesterday in New York while Ford fell 1.7 percent to $17. This year, GM has climbed 25 percent and Ford has surged 31 percent, each outpacing the 16 percent increase for the S&P 500 Index.
GM and Ford fell to junk status in 2005. GM’s corporate credit rating from S&P is BB+, the highest non-investment grade. The Detroit-based carmaker is introducing 18 new and refreshed vehicles this year in the U.S., transforming its lineup into one of the newest in the industry from one of the oldest. The new models, along with the U.S. government’s announced plans to exit its ownership of GM after a 2009 rescue, have given investors increased confidence in the automaker.
Ford revamped its lineup with the help of a $23 billion loan it secured in late 2006, which enabled the automaker to avoid the bankruptcies and bailouts that befell GM and Chrysler. To secure that financing, the second-largest U.S. automaker had to pledge all major assets, including the Ford blue oval logo, as collateral. Ford recovered control of its logo last year after being upgraded to investment grade by Fitch Ratings, Moody’s Investors Service and DBRS Ltd.
“The fact that we are now rated investment grade by all four major ratings agencies is further evidence of the continued progress the Ford team is making,” Bob Shanks, Ford’s chief financial officer, said in a statement. “Our plan is to maintain investment grade throughout an economic cycle.”
Detroit’s reckoning and revival have the U.S. automakers growing like they haven’t in years. U.S. market share this year for GM, Ford and Chrysler improved to 45.4 percent, from 44.8 percent last year, excluding sales of Fiat-brand cars sold by Chrysler. The companies are on track to sell about 7 million cars and trucks in the U.S. this year.
In the first half of this year, the Detroit Three made more than $6 billion before the industrywide annual sales rate breached 16 million last month from the year earlier’s 14.5 million. Last year, GM, Ford and Chrysler, which is majority-owned by Fiat SpA, combined to earn $13.5 billion, even as industry sales were 17 percent below the peak of 17.4 million set in 2000. And they’re making money on models that were once loss leaders, such as the Ford Focus and Dodge Dart small cars.
The latest offerings from Detroit, stuffed with new technology to improve fuel economy and keep drivers constantly connected, are commanding higher prices. The average price a consumer paid for a Chrysler model rose 3.9 percent from last year to $32,447, according to researcher Kelley Blue Book. Ford commands an average price of $34,455, up 1.5 percent from last year, and GM gets $34,527, up 0.7 percent.
“Prices are up, volumes are up and their costs are down,” George Magliano, senior economist at IHS Automotive in New York, said in an interview yesterday. “You don’t need to be a genius to figure this one out. You’ve got everything going for you right now.”
Yet trouble spots remain, particularly in Europe where GM and Ford are losing money.
“The biggest problem area for these companies remains Europe,” Picciotto said.
S&P sees signs of progress in the restructurings each automaker is making in that region, where a prolonged recession has devastated auto sales.
Ford has gained about 2 percentage points of retail share in Europe, to 8.4 percent, demonstrating that new models are “gaining traction,” Picciotto said. GM lowered losses in Europe in the first half of the year, though finding a “pathway to profitability” in that region remains its “greatest challenge,” S&P said in a statement.
GM is earning “significant profits” in China, where it’s the top-selling automaker, S&P said. Ford, a distant also-ran in the world’s largest auto market, is accelerating rapidly, Picciotto said.
“We’ve seen traction for Ford in China, where they’ve pretty rapidly gained sales,” Picciotto said. “They’re making progress in China, where they lag GM pretty considerably.”
S&P is looking for more geographical and product diversification in GM and Ford profits, Picciotto said.
“There’s still some key elements that could be improved from a credit perspective,” he said. “And that is diversification of the profit, which right now is heavily North American and we believe within North America, heavily truck.”
Fitch Ratings last week revised its outlook on GM to positive and said further improvements by the company could lead to an upgrade within the next 24 months. Fitch also rates GM as BB+.