Being Optimistic About Ford

Ford Motor Co. (F - Analyst Report), the only member of the Detroit Three that evaded bankruptcy, recently announced that it would enhance its production level by 16% y-o-y to 485,000 vehicles for the third quarter of this year.

The raise comes on top of a planned 10% increase to 460,000 units announced last month. Ford will manufacture an additional 15,000 cars and 10,000 trucks compared to its previous production schedule. It will focus on cars such as Mustang and Focus as well as on pickup trucks.

Ford’s move is mainly driven by strong sales results expected in June. According to the Ford U.S. sales analyst George Pipas, North American vehicle sales during the month could decline by 25%–30%. This will then be the least sales decline that the industry has witnessed since September 2008.

According to Pipas, Ford’s sales could even decline by 10%–20% during the month and if it does, it would be the lowest since July 2008. In the first five months of 2009, the company posted a monthly average sales decline of 37.4%. Pipas assured a revival of consumer confidence and stated that the worst is over for both auto sales and the economy.

Considering the overall outlook for the company, Ford’s decision to raise production appears to be in line with the previous positive remark about its financial position. In mid-June, Ford’s CEO, Allan Mullaly, commented that the company has a sound balance sheet and is progressing towards further reduction in debt. The company is also continuing talks with UAW on ways to boost its cost effectiveness, including issues such as no-strike provision that had been rejected by the Ford workers in 2008.

Overall, in line with its business viability plan presented in December last year, Ford still anticipates returning to profitability and generating positive cash flow in 2011. Unlike its peers, General Motors (GMGMQ) and Chrysler, Ford has survived bankruptcy due to its $23.5 billion liquidity raised in 2006.

However, the company does not stand in a better position compared to General Motors and Chrysler in their post-bankruptcy situation. At the end of first quarter of 2009, Ford had about $32 billion in debt. In contrast, Chrysler left bankruptcy with about $11 billion in debt and GM will be left with about $17 billion in debt after the bankruptcy process. This is because Ford’s cash reserves were built not through profits but by mortgaging most of its assets.

Hence, we reserve our opinion to recommend Ford as Hold with a target price of $6.50.