Ford: The Last Brutal Quarter

It is generally assumed that sales volumes will steadily rebound, rising toward the 11 million mark in 2010, and to a range of 12.5 million to 13.0 million units in 2011, and approaching 15 million by 2013. By that logic, the average age of cars will be steadily rising over the next three years, and the average car will have more than 100,000 miles on the odometer by then. Many cars can last 200,000 or miles or more these days, but Consumer Reports has shown that for many cars, the decision to hold on to cars past 125,000 miles brings diminishing economic returns due to rising costs. Credit Suisse, which anticipates 13.8 million in annual unit sales in 2011, is perhaps even a tad too aggressive in that context.

The analysts also assume that Ford will hold a 14% market share in 2011. As a point of reference, Ford once held a quarter of the market (all those F-150 trucks make a difference), but that figure has been steadily dropping around 100 basis points a year to a recent 15%. The analyst assumes that Ford will lose another 100 basis points of market share in the next two years, but the converse appears just as likely, considering the favorable impressions that Ford's projected product line has garnered in the trade press, and the stated plans of shrinkage at GM (GM Quote) and possible outright demise at Chrysler.

Chrysler holds roughly 11% of the market, and even if Fiat comes to its rescue, it will be several years before the brand might start to resonate again with customers. (See how long it took the Korean automakers to build brands in the U.S. market.) And this assumes that Chrysler survives at all.

According to Credit Suisse's sensitivity model (and using 14 million units as an industry sales figure), the difference between losing a point of market share (to 14%) and gaining a point of market share (to 16%) yields a $1.6 billion swing in EBITDA, or about 50 cents a share.

The pace at which the industry gets back on its feet in the near term is an open question. But assuming that Ford can stay afloat and post a 16% market share by 2013, and that the industry can get back to around 15 million units by then, Ford would be in a position to generate roughly $10.8 billion in EBITDA, which translates to roughly $4 a share, above the current share price.

Ford EBITDA forecast ($millions) Market Share Annual Industry Unit Sales (SAAR) (millions) 11.0 12.0 13.0 14.0 15.0 16.0 17.0 11% $ 3,700 $ 4,300 $ 5,000 $ 5,600 $ 6,300 $ 7,000 $ 7,600 12% $ 4,300 $ 5,000 $ 5,800 $ 6,500 $ 7,200 $ 7,900 $ 8,600 13% $ 5,000 $ 5,800 $ 6,500 $ 7,300 $ 8,100 $ 8,900 $ 9,700 14% $ 5,600 $ 6,500 $ 7,300 $ 8,200 $ 9,000 $ 9,800 $ 10,700 15% $ 6,300 $ 7,200 $ 8,100 $ 9,000 $ 9,900 $ 10,800 $ 11,700 16% $ 7,000 $ 7,900 $ 8,900 $ 9,800 $ 10,800 $ 11,800 $ 12,700 17% $ 7,600 $ 8,600 $ 9,700 $ 10,700 $ 11,700 $ 12,700 $ 13,700 18% $ 8,300 $ 9,400 $ 10,400 $ 11,500 $ 12,600 $ 13,700 $ 14,800 Source: Credit Suisse

So, will Ford stay afloat? That question is why this Friday's conference call is so important. Investors will be able to gauge the quarterly cash burn, now that so many costs have been taken out of the P&L. From peak to trough, Ford will have shed 43,000 employees (22%) and $8 billion in annual operating costs. And it will be able to better assess how quickly (or slowly) losses will diminish as industry sales volumes start to rebound. Suffice it to say, if the industry sales remain very, very weak for three to four more quarters, then we won't even be talking about Ford's equity at that point.