Ford Fans Ignore Red Signal

As the great U.S. credit bubble deflates, just watch the air come out of Ford's (F - commentary - Cramer's Take) tires.

It's no exaggeration to say that, without prodigious profits over the past three years from their lending arms, both Ford and General Motors (GM - commentary - Cramer's Take) would be fighting for their lives. Now, Ford's earnings forecast for 2005, released Tuesday, shows that there's going to be a big drop in the credit company's profits.

Investors shrugged off worries about finance-unit earnings at the Dearborn, Mich.-based auto giant, pushing Ford shares up 16 cents Tuesday to $13.23. The market's lack of alarm may stem from the fact that, even if credit-related earnings fall in 2005 from 2004, they are still looking fairly robust. Wall Street also may have been applauding a big increase in expected 2005 profits from Ford's auto operations, which have sagged in recent years.

But investors shouldn't be comforted by such thoughts. Ford's credit earnings over the past two years have been bloated with hard-to-repeat gains. As a result, Ford's lending outfit will probably provide negative surprises, rather than pleasant ones, over the coming quarters -- even after taking into account the projected decline in profits.

In addition, the auto unit's ambitious profit forecast looks hard to achieve, given the car business's poor performance in the fourth quarter.

In short, it looks like Ford is bravely insisting a big pickup in the car business will make up for a big drop in credit earnings. But expect the drop in financial operations to be worse than expected and the gain in autos to sputter.

In the past three years, Ford's credit business has been a massive contributor to companywide earnings. In 2004, for example, Ford's financial businesses made $5 billion in pretax profits, compared with just $850 million from automotive (both numbers exclude special items). This year, Ford expects to make $3.5 billion to $3.7 billion from credit, and $1.5 billion to $2 billion from automotive (again, excluding special items).

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In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to [e-mail].