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Flea-Bitten Ford Gives Investors a $600 Million Reason to Dump the Stock

Last Updated September 23, 2020 1:49 PM
William Ebbs
Last Updated September 23, 2020 1:49 PM
  • Ford released preliminary first-quarter results that predict a massive collapse in revenue and EBIT.
  • The company is undergoing an ill-advised restructuring program that was designed to boost its margins. But it isn’t working.
  • Ford faces many challenges, including a recent debt downgrade. And it will continue to underperform the stock market.

Investors who hoped for a V-shaped recovery in Ford stock will be sorely disappointed as the company continues to burn shareholder value. The automaker expects to lose $600 million  in the first quarter alone despite generating $34 billion in revenue.

Ford’s inability to generate profits is cause for concern. The company’s multi-billion dollar restructuring program  was designed to boost profitability. But it has completely failed.

Ford stock was already a dog. Now, it’s a dog with fleas . And investors can expect the struggling automaker to continue underperforming the market as relentless cash burn sends its credit rating further into junk status.

Ford’s Restructuring Plan Is a Complete Failure

In July 2018, Ford embarked on an $11 billion restructuring program  designed to trim fat in the business and eliminate redundancies. The plan included the discontinuation of most of Ford’s U.S. sedan lineup to focus on higher-margin trucks and SUVs.

While the strategy caused brutal layoffs and the discontinuation of beloved brands  like the Taurus, it hasn’t resulted in the higher margins that management promised.

Ford’s fourth-quarter results were dismal.  Total revenue fell 5% from $41.8 billion to $39.7 billion. U.S. EBIT margins fell a staggering 64% from 8.8% to 2.8%. Margins in Europe and China were 0.3% and -21.5%, respectively. And, unsurprisingly, the company lost $1.7 billion in that quarter alone.

Remember, this was before the coronavirus pandemic. So Ford’s situation will go from bad to worse in 2020.

Expect Further Cash Burn in the First Quarter

ford stock
Ford stock is likely to continue underperforming the market over the long term. | Source: Johannes EISELE / AFP

Ford just released preliminary first-quarter results that anticipate vehicle wholesales to drop by 21%, revenue to decline by 15%, and EBIT to come in at negative $600 million. 

The company’s total long-term automotive debt stands at around $14.6 billion, while credit debt stands at a whopping $140 billion.

Ford may have a hard time meeting its obligations as cash burn from the automotive segment intensifies while defaults start to pile up in its credit segment amid coronavirus lockdowns and a worsening global recession.

Ford Debt Is Officially Classified as Junk

Ford’s long-term debt is soaring amid deteriorating cash flow. This chart includes debt from the credit segment. | Data by Ycharts. 

As if massive losses weren’t bad enough, Ford’s once-respected name has been downgraded to junk status.

In late March, credit rating agency S&P Global Ratings downgraded the company’s bonds to junk status due to “prolonged weakness” in profits and cash flow. Moody’s investor services downgraded Ford  to junk back in September.

With low credit ratings come higher borrowing costs. This will intensify pressure on Ford’s already strained cash flow. The company paid $546 million in interest expense  in 2019, down from a whopping $729 million in 2018.

Investors can expect interest expenses to start soaring again in the coming years as the company is forced to pay more to its lenders due to an increased risk of default.

Will Ford Survive the Coronavirus Crisis?

Ford stock is dramatically underperforming the wider market due to relentless cash burn in the business. | Data by Ycharts. 

Ford’s management team is taking aggressive steps to maintain the liquidity they need to survive this crisis without turning to a government bailout or massive equity dilution.

The company recently suspended its dividend  (which cost around $2.4 billion in 2019). And it decided to borrow $15.4 billion against two unused lines of credit  to offset the impacts of coronavirus-related shutdowns.

This added liquidity should help stave off bankruptcy. But the automaker’s balance sheet is getting weaker. And Ford stock is likely to continue underperforming the market over the long term.

Ford’s stock is down around 5% today  after the poor first-quarter guidance. Shares have fallen over 45% year-to-date compared to a 15% decline in the S&P 500.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.