Ford's recent quarterly report was a disaster, but will the government stimulus plan end up saving Ford (NYSE:F) and the other auto manufacturers? The earnings report has been widely reported already, but here are some of the highlights, or perhaps, more appropriately, the "lowlights".
By the Numbers
- Fourth quarter net losses totaled $5.9 billion (including a $1.4 billion pension-related charge), or $2.46 per share.
- Ford burned through $21.2 billion in cash during the full year 2008.
- The company ended the quarter with $13.4 billion in cash, excluding a $10.1 billion draw-down from its credit line, which it will receive on February 3, 2009. (Ford's actual cash balance after receiving these funds remains unclear because the $13.4 billion total was as of December 31, 2008 and the company most likely burned through more cash in January 2009.)
- Total debt, excluding credit lines, equaled $25.8 billion. (Only $3 billion of the company's debt is due within the next three years.)
(Find out more in Earnings: Quality Means Everything and Surprising Earnings Results.)
Ford is not the only company having problems with profitability in the auto industry. Honda (NYSE:HMC) recently cut its annual profit outlook for the fourth time and believes that its annual car sales will drop 400,000 units. Meanwhile, Toyota (NYSE:TM) expects to report its first annual net loss since 1963.
On the domestic side, General Motors (NYSE:GM) and privately-owned Chrysler were forced to ask the U.S. government for more money in order to maintain operations.
Stimulus Plan
The House of Representatives approved the American Recovery and Reinvestment Act of 2009, which allots $600 million "for the acquisition of motor vehicles, including plug-in and alternative fuel vehicles." However, at an average cost of $35,000 per vehicle, only 17,000 cars could be produced, which certainly is not enough to bring Ford or any of its domestic peers to cash flow breakeven.
A more promising proposal percolating in the halls of Congress has been dubbed the "cash for clunkers" plan, which involves a tax credit of up to $4,500 for individuals who replace older vehicles more fuel efficient models. Although this provision was not in the House version of the plan, it is reportedly being considered for debate in the Senate. Unfortunately, it is hard to predict how many additional car sales the plan will stimulate.
Ford is probably the most advanced of the Big Three domestic automakers when it comes to manufacturing alternative fuel vehicles and cars that are more fuel efficient. Last summer, the company announced a restructuring scheme that includes doubling its volume of hybrid vehicle production and offering several new models,which would give the company four hybrids to offer the public.
Mea Culpa
Last summer I criticized Ford for investing too much money into fuel efficient vehicles at a time when I believed oil prices were on the verge of a precipitous drop. My belief was that the political support for tax credits for alternative fuels would whither away following a drop in oil prices. Now, I have to give Ford management credit for reading the political situation better than I did. These proposals seem to have strong political legs.
The Future
The real story for Ford is not the misery of 2008, but the prospects for 2009. The company is planning its year based on industry volume of 11.5 million to 12.5 million car sales in the United States. In 2008, industry volume was at 13.5 million units, but fell off significantly during the last few months of the year. In December 2008, U.S. car sales only totaled a seasonally adjusted annual rate of 10.3 million. To remedy the drastic drop in sales, Ford plans to take another $4 billion out of its cost structure during 2009 in order to lower its breakeven point further. In addition, Ford has refused to accept loans from the government thus far, which indicates a level of confidence at the company.
Bottom Line
Although Ford's quarter was worse than expected, the government stimulus plan may give the company an upside on sales to meet its goals for the year. Putting resources into fuel efficient vehicles, Ford hopes to better position itself going into 2009. (Learn more about the car industry in The Industry Handbook: Automobiles and Analyzing Auto Stocks.)
