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FreeMarkets (41.54)

A Sure Thing



December 19, 2008 – Comments (3) | RELATED TICKERS: F , GM , TM

In the stock market, there are no "sure things", but there are educated guesses based on analysis.  Admittedly I had a REALLY good first day and I don't expect that to continue, but there is one pick I made yesterday that sure feels like a "sure thing".

That pick is FORD.  At around $2.75, the company is valued just under $7 billion dollars.  There investment (what's left of it ~ 11%) in Mazda, plus Volvo is worth about $750 million (that's in today's value, not last years).  

There are SERIOUS problems with Ford (it's not under $3 share because investors are stupid).  It's long term debt/equity ratio is approaching 25 (compare that with GE at under 3).

So what makes this a buy, let alone a "sure thing" - the answer is the pre-packaged bankruptcy of GM and Chrysler.  Any deal the UAW gives the other two will have to go to Ford - that's been the way the UAW squeezed concessions out of the company's before, by making a deal with one then demanding the same deal from the other two.  But the UAW is a small part of why Ford is a steal at these prices.  GM and Chrysler account for 33% of domestic auto sales.  Most of their revenues come from trucks (over 55% for GM and over 65% for Chrysler).  With a pre-packaged bankruptcy, the government will keep the suppliers Ford needs in business by guaranteeing GM/Chrysler IOU's.  According to the BEST estimates, 20% of buyers will stay away from company's in bankruptcy.  Instantly 7% of the auto market opens up to Ford, Toyota and Honda.  Toyota should take the lions share and gobble up 3%, Ford 2.5%, and Honda about 1% - with the last 0.5% going to the smaller auto makers.

With auto sales in the toilet (currently an 11 million run rate), Ford grabs a quick 275,000 units - enough to slow their loss rate and generate enough revenue that they won't need to borrow cash through 2009.  GM/Chrysler will continue to be saddled by poor product line-ups through 2010, but Fords plan to bring over the hot selling Ford Fiesta and new Ford Focus from Europe should energize their car sales into next years turn around - couple with a Ford F150 that's only a year old, and two new hybrid cars.

Ford will have a lineup that is very similar to Toyota's (though Fords will still be top heavy on trucks).  And I strongly doubt Ford will hit its peak of $30/share anytime soon.  But come 2011, this stock should surely triple to around $8.50/share.  I'm long Ford in CAPS, and long Ford in real life.  That said - anything can happen, even to a sure thing, so DIVERSIFY your portfolio!

Good luck and good investing.

3 Comments – Post Your Own

#1) On December 19, 2008 at 8:10 AM, TMFMarlowe (56.66) wrote:

Ford will survive and maybe even thrive, I think. But if it requires a trip through bankruptcy court, the common stock may not survive. Buying Ford preferreds and/or debt seems like a better way to go offhand, though I haven't looked into this in a while.

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#2) On December 19, 2008 at 9:47 AM, givmeabreak (28.94) wrote:

As with betting football, there is one dangerous thing that blinds you to getting crushed on your bet: Assumptions.

Yours are these: "Ford's plan to bring over the hot selling Ford Fiesta and new Ford Focus from Europe should energize their car sales into next years turn around"

What in the world makes you think that next year things will turn around. Or better yet, define "turn around".  I can't see this personally.

Second: "With auto sales in the toilet (currently an 11 million run rate), Ford grabs a quick 275,000 units"

What if cars sales nationwide fall 50% in 2009? What is to say that past sales figures will indicate future sales figures? What if new car sales fall 75%? Even if Ford grabs more sales, the pot they are grabbing from would be a lot smaller. You said yourself sales are in the toilet. That is now. What about next year if things don't turn around?

I am sorry if I am coming off antagonistic, just want to challenge your thesis for constructive reasons. My family does this all the time to me, and I always feel that they are being antagonistic. Really, they are just trying to get me to think outside of my "sure thing" to make sure I have considered worse case scenarios.

Whenever I have a sure thing feeling when I bet football, I get nervous right at kickoff, because 75% of the time I get crushed. Typically I get the initial sure thing feeling because I have fixated on a couple of big assumptions. They usually are correct, but some other factor that I have ignored comes into play and wrecks it.

Good luck with your pick, there is no reward without some risk, and sometimes you have to trust your convictions.

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#3) On December 19, 2008 at 12:25 PM, FreeMarkets (41.54) wrote:

Nothing wrong with question assumptions - I think all stocks are based on assumptions.  What if a competitor introduces a better MP3 player and Windows 7 is so great Apple falls - or vice versa, no one yet has realeased a better MP3 and Vista sucks.

That said, the run-rate for autos has been between 15 million and 17.5 million for the last ten years and while I don't expect it to be great next year, I don't expect it to be any worse.  If it does drop to 8 or 9 million sales next year, you can kiss Ford goodbye without a big bailout.

Not mentioned is the strength of the Yen, which will put pricing pressure on Toyota and Honda, which should help Ford as well.

All of that said - you are right, these are assumptions and speculation.  I strongly recommend diversification - even a little on the short side of the market.

Good luck and good investing.

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