Are You Crazy To Buy Ford Stock Right Now?
The Dynamic Wealth Report
March 20, 2009
Time To Buy Ford... Are You Crazy?
Let me ask you a simple question… Is now the time to buy Ford
Motor stock? Think about it for a moment. Ford is trading at just over
$2.50 a share. That’s an 83% discount from its high price just
five years
ago. The car market is in turmoil, and the Federal Government just
announced another round of financial assistance for the industry.
Is this a great deal, or just a money pit to throw your hard earned
dollars down?
My answer might surprise you. But first, why am I asking this crazy
question?
This morning I was driving into the office. I had one hand on the
steering wheel and one around my morning cup of coffee. It was just like
any other ordinary day… Then the news report started.
I was shocked at what I heard. UBS research analysts had initiated
coverage on both Ford (F) and General Motors (GM). For those of you who
don’t know, initiating coverage means an analyst is starting to cover a
company on a regular basis. It’s an opportunity for the analyst to
impress the big institutional money managers with their analysis and
conclusions.
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The shocking news wasn’t that they were starting to cover the
company. Nor was it shocking they rated GM a “SELL”.
What shocked me was rating Ford a “BUY”.
My first thought was, Are they insane? Were they kidding? This had to be
a joke!
But they were serious.
Business has been really tough in the auto industry. In December of 2008,
sales were down 38%. Sales fell 34% in January 2009, and 41% in
February! The industry is going on 16 straight months of declines. Nobody
wants to buy a car these days.
Not helping the auto industry is the credit market. Credit is tougher
than ever to get these days. Even if you wanted to buy a car, financing
isn’t often available. Needless to say, the auto makers are losing
money, a lot of money every day.
Is there positive news anywhere? If you look closely, there may be a
silver lining to the dark cloud.
First and foremost for Ford is news they’re conducting a debt
restructuring. Simply, they’re trading the debt they owe for stock. This
cuts down on their interest payments and gives them breathing room. In
total, the company’s looking to swap out just over $10 billion in debt,
or about 40% of their total burden.
So, the creditors are giving a little. How about the unions? Normally
one of the tougher groups to negotiate with, this time around, they’re
being helpful. Union workers are agreeing to a wage freeze and a cut in
benefits. These huge cost reductions should help Ford return to
profitability much sooner than later.
All of these moves are helping restructure Ford to be more competitive.
Best of all, they’re much better positioned on the financial liquidity
issue. What do I mean by that? Simply they are at less risk of running
out of money when compared to the other two big auto manufacturers.
That’s not a small issue.
Ford is the only US automaker to reject financial assistance from the US
government. Because of this, potential car buyers are flocking to Ford
as their number one choice. I guess it’s true everyone loves a winner!
Clearly the constant pleas for bailout from GM and Chrysler are hurting
the company (and rightfully so).
And that’s what got me thinking about Ford as a big winner. Think about
it. Is the auto industry really going to disappear from the US? No, of
course not. So if you’re betting on an eventual rebound (maybe 3 to 5
years from now) you definitely want to be invested in the strongest
company out there. And right now that looks to be Ford.
That’s not the only reason.
A big area of concern was the survival of the auto suppliers if the big
auto makers face a shake-up. In other words, what happens if one of the
“Big Three” goes bankrupt or gets liquidated?
This is where the recent government actions mitigate the fear.
This week, the White House announced $5 billion in aid to the auto part
suppliers network. They will guarantee payment for delivery of parts to
the major auto makers. This action comes on the heels of more than 40
auto parts suppliers filing for bankruptcy. It gives the entire industry
a lifeline of support, and that will help.
The risks of Ford’s moves.
What Ford is doing is not without risk. By converting debt and making
some healthcare payments in the form of stock, the company is facing
dilution. Big dilution. This will obviously impact the value of today’s
common shares. Nevertheless, I see the moves making Ford a healthier and
more profitable company in the long run… and nothing says once they
return to profitability they can’t buy back their shares.
And that leads to my shocking admission.
After further thought, I think Ford might indeed be the big winner in
the industry. Although buying shares here is still a big risk, if you
look at this investment like a lottery ticket, you might end up with a
big payout in a few years! It’s worth a closer look…
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• Johnson & Johnson (JNJ) was upgraded by UBS from
a “Neutral” to a “BUY”. The upgrade comes on the heels of a positive
review from the FDA on one of their drugs.
• Dennison Mining (DNN) was downgraded by Credit Suisse
and Raymond James to an “Underperform” rating. The uranium processor has
suffered from a steady decline in prices. The stock right now trades at
under $1.
• Robert W. Baird recently initiated coverage on AutoZone
(AZO) with an “Outperform” rating. With auto sales down, repairing cars
is the activity of the day.
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