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Ford Earnings: The Good, The Bad, The Ugly


Here are the details...


Overall, it was another disappointing quarter from Ford (F). The carmaker posted a 3Q '06 loss of $1.2 bln or $0.62 per share, missing expectations by $0.01, compared to $0.15 last year. Here are the details:

The Good:

Alan Mulally (new CEO since September 1) says: "results are clearly unacceptable."

So improvement should be expected.

  • However, his predecessors had said the same, and things have only deteriorated – 3Q '06 operating loss was 4x larger than last year's. Also, the company had worldwide automotive losses of $1.8 bln vs. 1.2 bln last year.

A focus on liquidity – considering securitization of assets.

  • Ford is reviewing whether to keep brands (no timetable given though).
    • The company may raise over $1 bln from the expected sale of Aston Martin.
  • The company had total cash and equivalents of $23.6 bln (unchanged from 2Q '06) meaning it will not go bankrupt for the time being.
    • However, the company's cash flow from operations was a negative of $3.1 bln in 3Q '06.

Ford cut costs by $1 bln so far this year.

  • It's still not enough, judging by today's huge operating losses (auto losses of $1.8 bln; total loss of $1.2 bln.

CDS actually tightened 10 points to 650, having come down 300 points since mid-July. Though they are up from 610 in early September '06.

The Bad:

The headline number misses already depressed expectations for 3Q net loss of $0.61 per share by $0.01.

  • Auto losses will remain "significant" through 2008.
  • 4Q '06 results will show sequential deterioration.

The company just cannot make money making cars:

  • Total automotive revenue fell to $32.6 bln from $34.7 bln.
    • Mitigating Factor: The number beat expectations (Thomson Financial) of $32.06 bln.
  • Auto losses were fairly widespread across markets, except Latam.
  • North American operations were the worst.
  • Mulally says: "The fundamental business reality is that customer demand is shifting to smaller, more efficient vehicles."
    • Unfortunately, Ford is strong on SUVs and pickups, which are being shunned by customers.
  • The company is behind the curve in terms of adjusting capacity to quickly disappearing sales –
    • 3Q output was down 11% vs. 17% drop in overall North American sales and a 25% drop in F-series pickups.
    • The company plans 4Q North American output cuts of 21%.

The Ugly:

The company will have to restate five years of performance due to improper accounting for derivatives.

Lots of "one time" items, that we can probably expect to see for the next three years:

  • Amounted to $4.6 bln after tax in 3Q '06.
  • Job cuts will probably continue, amounted to $861 million in the quarter.

Items may balloon to $9.5-10.5 bln for FY '06.

Ford Motor Credit results, which had acted as a buffer in recent quarters, were down to pretax of $448 mln from $1.1 bln last year.

Fitch places a B+ rating on watch negative.

Ignacio Benitez also contibuted to this article.

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