Ford Doesn’t Need Help - Really?

Thursday, Ford Motor Company (F) reported 4th quarter results for 2008. On an after-tax basis, Ford lost $3.3 billion in the fourth quarter or $1.37 per share, compared with a loss of $487 million, or 23 cents per share, a year ago. Ford’s 4th quarter revenue was $29.2 billion, down from $45.5 billion a year ago.

The decline is primarily explained by lower volume, the sale of Jaguar Land Rover and exchange translation. For the 4th quarter, Ford North America reported a pre-tax loss of $1.9 billion, compared with a loss of $1.5 billion a year ago. The decline was more than explained by lower industry volume and lower dealer stocks, partly offset by cost reductions. Fourth quarter revenue was $11.3 billion, down from $17.3 billion a year ago.

Ford Credit reported a pre-tax loss of $372 million in the 4th quarter, compared with a pre-tax profit of $263 million a year ago. The decline was primarily explained by a higher provision for credit losses, market valuation adjustments to derivatives and lower volume.

Ford reduced Automotive costs globally by $1.4 billion in the 4th quarter and $4.4 billion in all of 2008 versus year-ago levels. Overall, the company’s Automotive gross cash was reduced by $5.5 billion in the 4th quarter, while its operating-related cash flow was $7.2 billion negative.

The company said it finished 2008 with $24 billion in available Automotive liquidity, including $13.4 billion in Automotive gross cash. Ford also reconfirmed that, based on current planning assumptions, it does not need a bridge loan from the U.S. government, barring a significantly deeper economic downturn or a significant industry event, such as the bankruptcy of a major competitor that causes disruption to the company’s supply base, dealers or creditors.

Ford also said it remains on track for both its overall and North American Automotive pre-tax results to be breakeven or profitable in 2011 - excluding special items - based on current planning assumptions. Due to concerns about the instability of the capital markets with the uncertain state of the global economy, Ford announced it is drawing its available credit lines. The company said it expects to receive the funds on Feb. 3 and will add the $10.1 billion to its cash and reflect it on its first quarter 2009 balance sheet.

Also today, Ford said the United Auto Workers union has agreed to end the “jobs bank” at Ford, known as the Job Security program. The company and the union presently are working out the details of implementation.

Conclusion: We disagree that they will not need help from the US Government. Why?

• Ford’s market share is likely to fall continuously due to its inclination towards truck sales
• Overcapacity exists, which leads to weak pricing
• Costs are elevating due to product launches and higher incentives
• Pension and health care issues are major concerns for the company
• Demand for autos is down (15)% due to a weak economy and weakening real estate market. Demand is also hurt by weakening employment. The recent credit crunch is crippling to auto sales, and this has a trickle-down effect throughout the industry

We believe that the company should file for bankruptcy to rid itself of unions, pension and healthcare issues and separate dealerships from the rest of the company. The U.S. government should provide $25-$50B in aid, which will act as DIP ["debtor-in-possession"] financing. Any aid should force the company to only make 35MPG+ vehicles.

Management should be purged and outsiders brought in. Tariffs and quotas should be implemented for imported vehicles from overseas. Consumers should be allowed to deduct their automotive interest.

Lastly, global alliances should be forged among producers in North America, Europe and Asia. Ford itself should consolidate and clean up product line and focus on AFVs and away from SUVs.

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