Photograph by Scott Olson/Getty Images
debt caught a downgrade after the close on Wednesday. It is now rated junk, as Wall Street calls speculative-grade debt.
The term isn’t pejorative among industry insiders, but the junk rating has some implications for Ford’s future cost of financing that will inevitably hurt the stock price. Ford (ticker: F) shares, however, were up on Thursday afternoon, rising about 2.3%.
The near term is weighing more heavily on investors’ minds than long-term financing costs. The $2 trillion stimulus package passed recently by the Senate helps all U.S. businesses, Ford included. Figures on March auto sales will be released in a few days and Ford is already talking about restarting idled plants in early April.
Restarting production is good news and investors will welcome any positive. It has been tough for all automotive investors lately. The Russell 3000 Auto Auto Parts index is down about 24% year to date, a little worse than the comparable drops for the
Dow Jones Industrial Average
Ford shares are off about 41% so far in 2020.
SP Global Ratings downgraded Ford debt from BBB- to BB+. Losing one B is what sent the bonds into junk status. Moody’s, another significant bond rater, downgraded Ford debt earlier this week.
“SP noted that Ford’s previous [investment grade] rating became borderline prior to the Covid-19 outbreak,” wrote RBC analyst Joseph Spak in a Thursday research report. “Now given the downturn, it is unlikely that Ford would maintain the required metrics.”
SP, according to Spak, believes earnings before interest, taxes, deprecation and amortization, or Ebitda, will remain below 6% of sales for the foreseeable future. That’s is below-average profitability.
’ (GM) Ebitda margin, for comparison, is about 13%.
“Ford has [about] $35 billion in liquidity,” adds Spak. “Ford could withstand [about] 20 weeks of no production.” Ford, along with GM and
Fiat Chrysler Automobiles
(FCAU), stopped making cars in March to protect workers from the continuing viral outbreak.
Ample liquidity is good but the debt downgrade means “more costly funding,” according to Benchmark analyst Mike Ward. That, he said, will hurt Ford’s competitive position.
Both Ward and Spak are cautious on Ford shares, rating them the equivalent of Hold. Ward doesn’t have a price target, but Spak’s is $6.50 a share.
That price works out to about 8 times estimated 2021 earnings per share. Car companies traditionally trade at big discount to the broader market. The SP 500 trades at about 14 times estimated profits for next year.
Next up for the auto makers is March sales numbers, to be released within the first few days of April. Wall Street expects the figures to be brutal. Spak thinks sales will come in at an annualized rate of about 10.3 million cars and light trucks, compared with 17.3 million in March 2019.
“By our estimates, U.S. light vehicle sales were up 1-2% on a daily selling rate basis in the first 15 days of March,” wrote Ward in a recent research report. “Showroom traffic dropped 25-50% last week and in our view, will ground to a halt the last 10 days of the month.” He thinks the March selling rate will be about 12.6 million.
The range of forecasts is wide because the Covid-19 situation is fluid.
Write to Al Root at firstname.lastname@example.org