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have started to gain a lot of Street cred. After bottoming at $1.70 on March 6, the stock went on to rise in 10 of the next 11 sessions, hitting $2.90 on March 23. After moving sideways into early April, the stock again rose in seven out of eight sessions, and recently traded hands at $4.30. Ford still has its detractors: A Credit Suisse analysis suggests the stock is worth no more than $3.
(Goldman Sachs upgraded Ford to a buy on Wednesday with a $6 price target, but this column looks more closely at the bear case issued by Credit Suisse.)
At this point, investors must wrestle with a pair of key questions. First, should the stock get credit for possible market-share gains and cash-flow growth resulting from the deep distress at its domestic rivals? And second, is the company (and its equity) really out of the woods in the midst of this deep economic crisis?
Friday's quarterly conference call will enable investors to get a better read on key balance-sheet and expense metrics. And it will allow investors to stress-test the assumptions that yielded the above-noted $3 price target.
When looking at the automakers, the key assumptions revolve around industry sales volumes and relative market-share strength. The industry typically sold 16 million to 17 million units a year in good times but will likely sell fewer than 10 million units in 2009. Goldman Sachs, in its Wednesday upgrade of Ford, predicts that industry sales will hit 11 million this year, on expectations that a "cash for clunkers" program will be enacted.
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
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
and possible outright demise at
Chrysler holds roughly 11% of the market, and even if
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.
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.
In the near term, it won't be pretty. Ford likely burned through another $4 billion or $5 billion in the just-completed quarter and will probably burn another $4 billion to $5 billion over the next nine months before we get anywhere near break-even. Assuming Ford burns through $8 billion this year, then it will still have more than $8 billion in working capital at the start of 2010. (My math appears conservative, as Credit Suisse sees Ford with far higher cash balances in 2010.)
More than likely, Ford is four to six quarters away from a break-even quarter -- perhaps longer -- and the automaker is unlikely to report a profit before 2011. But don't underestimate the power that steadily shrinking losses have with creditors. Ford's existing and new lenders would be likely to take a soft approach if it appeared that Ford was well on its way toward moving back into the black.
And that should allow for additional re-jiggering of the balance sheet, without the need to massively dilute the equity. (Ford already took out $9.9 billion in long-term debt in a recent restructuring in exchange for $2.4 billion in cash and 468 million new shares, which expanded the share count by 20%.)
The lenders will want to see a solid rebound in EBITDA margins before opening up more credit, and that should be the case in 2010. In the 1990s, Ford's EBITDA margins handily exceeded 10% most years. Last year, the EBITDA margin actually turned negative, but it could rebound above 4% next year on only modestly improving sales and could approach 6% to 7% in 2011, thanks to the myriad cost cuts. EBITDA margins are crucial in another respect: They historically have determined an appropriate enterprise-value-to-sales multiple. As the margin rate rises, the EV multiple can expand as well.
All of these above-cited metrics will be fodder on Friday morning's conference call. Since first-quarter industry sales were quite weak, Ford will not have a good story to tell. But as investors better understand the potential for improvement in these metrics in these quarters ahead, the stock's value will come into sharper focus.
I will provide a fresh run through the numbers when Ford reports results Friday morning.
Know What You Own:
Other automakers include
( DAI) and
David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.