Benefit From Ford's Resurgence With Warrants

With Ford slated to report earnings on Friday, Scott Rothbort explains why he prefers the Ford warrants to the Ford common.
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BOLTING LANDING, N.Y. (Stockpickr) -- Ford Motor (F) - Get Report is slated to report its second-quarter 2010 results on Friday morning. The automotive company is expected to earn 40 cents a share on revenue of $29.79 billion. In the year-ago quarter, Ford lost 21 cents a share on revenue of $27.19 billion. At that time, analysts had expected Ford to lose 48 cents. For fiscal-year 2010, Ford is expected to earn $1.31 a share. In other words, Ford has returned to profitability.

There are other positive signs for Ford. Last week, I mentioned that Ford recently

announced the repayment of $3.8 billion of debt

as well as all dividends in arrears on its 6.5% Cumulative Trust Preferred Securities (FpS). These actions are all made possible by strong sales and cash flow. Furthermore, it sets the stage for a resumption of dividend payments on the common stock.

I like the Ford warrants (F-WS), also known as the health care warrants. They were originally issued by Ford to the union to help finance health care plans. Earlier this year, the union sold these warrants to the public. They can now be bought or sold on an exchange just like any other stock.

The terms of the warrants are as follows:

Each warrant is exercisable into one share of Ford.

The warrants expire on Dec. 31, 2012

The strike price is $9.20. In other words, should you exercise the warrants, you will have to pay an additional $9.20 for each share of Ford that you receive.

Now, let's understand some of the quantitative aspects of the warrants. For example, with Ford at $12, using the Black Scholes model, the value of the warrants was $4.25. Here is what you now need to know about investing in the warrants:

The break-even price of the warrants is equal to the warrant price ($4.25) plus the strike price ($9.20), which equals $13.25.

With Ford now selling at around $12, you are paying a premium for the time value of the option from today till Dec. 31 2012, in the amount of $13.25 less $12, or $1.25. That time-value premium will decline as the calendar moves closer to the warrant expiration. The decay of the time-value premium increases as time elapses.

Using a Black-Scholes model, I have calculated the following "Greeks" for F-WS:

Implied volatility: 37%

Delta: 79% (i.e., the warrant price will move in a 79% ratio to the price of Ford, at current levels)

Gamma: 0.49% (the delta will change at the rate of gamma)

So why would I prefer the F-WS to the Ford common? There are three reasons.

The first is leverage. Assume that the stock moves by 25% from $12 to $15 (a reasonable price target). If this would occur in just 60 days and if implied volatility declines from 37% to 32% (again, a reasonable expectation), then the warrant would go from $4.25 to $6.50, a 53% gain.

Second is the implied cost of financing the warrant. A $1.25 time premium on a $12 stock is a 10.4% premium. Amortize that over two and a half years, and you are paying just over 4% per annum to finance the position. That is better than margin rate or even mortgage rates.

Third, should the price of Ford drop dramatically, your potential loss in the common is far greater than the loss on the warrants.

There is a caveat. I would consider this to be a very likely concern. Ford is likely to reinstate its common stock dividend in the next year or two. If you own Ford, you are entitled to receive the dividend. If you own the warrants, you are not entitled to the dividend. However, the price of the stock should appreciate in the event that the company issues a common dividend. Thus, it is likely that in an indirect way, warrant holders will also benefit.

-- Written by Scott Rothbort in Bolting Landing, N.Y.

At the time of publication, Rothbort was long Ford warrants, although positions can change at any time.

Scott Rothbort has over 25 years of experience in the financial services industry. He is the Founder and President of

LakeView Asset Management

, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of

, an educational social networking site; and, publisher of

The LakeView Restaurant & Food Chain Report

. Rothbort is also a Term Professor of Finance at Seton Hall University's Stillman School of Business, where he teaches courses in finance and economics. He is the Chief Market Strategist for The Stillman School of Business and the co-supervisor of the Center for Securities Trading and Analysis.

Mr. Rothbort is a regular contributor to's RealMoney Silver

website and has frequently appeared as a professional guest on

Bloomberg Radio


Bloomberg Television


Fox Business Network


CNBC Television

, TV

and local television. As an expert in the field of derivatives and exchange-traded funds (ETFs), he frequently speaks at industry conferences. He is an ETF advisory board member for the Information Management Network, a global organizer of institutional finance and investment conferences. In addition, he is widely quoted in interviews in the printed press and on the internet.

Mr. Rothbort founded LakeView Asset Management in 2002. Prior to that, since 1991, he worked at Merrill Lynch, where he held a wide variety of senior-level management positions, including Business Director for the Global Equity Derivative Department, Global Director for Equity Swaps Trading and Risk Management, and Director for secured funding and collateral management for the Global Capital Markets Group and Corporate Treasury. Prior to working at Merrill Lynch, within the financial services industry, he worked for County Nat West Securities and Morgan Stanley, where he had international assignments in Tokyo, Hong Kong and London. He began his career working at Price Waterhouse from 1982 to 1984.

Mr. Rothbort received an M.B.A., majoring in Finance and International Business from the Stern School of Business, New York University, in 1992, and a B.Sc. in Economics, majoring in Accounting, from the Wharton School of Business, University of Pennsylvania, in 1982. He is also a graduate of the prestigious Stuyvesant High School in New York City. Mr. Rothbort is married to Layni Horowitz Rothbort, a real estate attorney, and together they have five children.