Ford: UAW Agreement Could Lift Stock

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Trefis) -- Both S&P and Moody's are reviewing Ford's ( F) credit ratings for possible upgrades, after a tentative agreement was struck between Ford and United Auto Workers (UAW). The agreement still needs to be ratified by unions and could face a tough time as some local unions have voted against it.

With the proposed agreement, Ford will limit its fixed costs by paying its workers more in profit-sharing and signing bonus instead of pay increases. Currently, Ford is rated BB- by S&P and Ba2 by Moody's, and we believe that a rating upgrade to near investment grade levels is likely once UAW votes in favor of the agreement this week. A similar contract between GM ( GM) and UAW led Fitch and S&P to upgrade GM's credit ratings because of cost control benefits.

Our price estimate of $14 for Ford's stock is more than 20% above the current market price.

We believe that limiting of fixed costs by Ford through its agreement with UAW will reduce selling, general and administrative costs as a percentage of its revenues over the medium term, which could provide upside to its stock.

More importantly it will boost Ford's competitiveness with regards to competition from GM and other large auto manufacturers by providing more stability to its operations. It will also lower Ford's breakeven point, such that its profitability will be protected even if U.S. auto industry slows down, which many analysts are predicting.

Ford will also be able to invest into its future through new facilities, products and technology to expand its reach and sales. Some of these investments will be mandatory -- the tentative agreement includes promises by Ford to invest $1.3 billion at eight Michigan plants, including $500 million at its Flat Rock plant for production of the next-generation Ford Fusion. This will support increase in capital expenditure costs over the medium term.

Ford's expected ratings upgrade will lower Ford's credit risk and thus lower its borrowing cost. This is especially important because Ford's short and long-term debt were almost three times that of GM by the end of second quarter. Moreover, Ford might be required to raise new capital through debt to fund its growth if worsening global economic environment hits global auto-industry in the near term.

Also Ford's credit rating upgrade will reduce the firms risk and lower its risk-premium or discount rate, which will provide further upside to the stock.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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