Ford Motor Company – May-08 What’S It Worth?
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LGA White Paper © All Rights Reserved Date Ford Motor Company – May-08 what’s it worth? Les Glassock of Les Glassock & Associates takes a detailed look at the Ford Financials and estimates what shares in the com- pany may really be worth in a few years from now. Every investor dreams about An investors view... investing in a company and • Kirk Kerkorian wants to raise his stake in Ford to 5.6%. Is making millions. Microsoft, this ego or a serious business Google, Berkshire Hatha- investment? way. • Long term investors have seen the share price drop 70%. So, does billionaire Kirk Ker- Should they hang in there or korian’s offer to buy an ex- Kirk Kerkorian, 2008 get out now? tra 20 million shares in Ford can – and is open to offers on the rest - under- lines the seriousness of its financial predica- • The Ford family always vote as signal that a dream is in the ment. a bloc. So far, they’ve retained making? If you were a long- control but lost $2 BN. Is now Ford Fundamentals the time to go? suffering investor – who’d • Should Ford dispose of all of seen their shares tumble Ford is two very different businesses rolled into one: a $150 Billion+ turnover global auto- the Jaq Nasser legacy—even from almost $30 down to $7 motive business, losing money since 1999; and Volvo? – would you be a buyer or a an $18 Billion financial services company that • If the Ford turn-around fails, seller? does the opposite. what are the options To put the automotive business in perspective: While Mr Kerkorian can afford to take big risks, most investors have to take a more balanced It accumulated operating losses between Contents view. They invest in shares for a five to ten FY1999 to FY2007 amounting to almost year period and, while it would be great if the $29 Billion or roughly $560 for every unit share price were to rocket in value in just a few they built in that period. Balance Sheet Funds Flow 2 months, most of them don’t expect it. Instead they pick shares carefully and expect them to These losses would have been $2.6 Billion Operating Cash Flow 3 mature slowly, but positively in the long run. more if the gains from sell-offs were ex- Ford Family Holding For many years Ford Motor Company was one cluded. Since 2005, Ford Motor Company of those. However, since 1998 shareholders sold off Hertz ($1.5 Billion), Kwik-Fit ($152 What the Shares might be 4 have seen billons wiped off the balance sheet – Million), and Aston Martin ($958 Million). worth much of it their money. On 1st January 1999, Ford opened at $32 Does this deliver shareholder 5 Of course Ford investors are not alone. Share- a share; by 27th May 2008 they closed at value? holders in Daimler (formerly DaimlerChrysler) $6.80 a share – a fall in value of 79%! In and GM have also lost money as strategies The End of Jaq Nasser’s dream 6 fact, in FY 1999 shareholders equity on the have unravelled. Some observers have sug- balance sheet stood at $27.6 Billion. By FY gested that the Ford global brand strategy, 2007, this had shrunk to $5.6 Billion, an- What is the Turn Around Plan 7 bringing Jaguar, Aston-Martin, and Range other drop of 80%! Rover alongside Ford and Volvo cars, was cor- rect and better shareholder value would have Financial Services to the rescue! About Us 8 delivered by keeping the group together. The fact that Ford has disposed of every asset it Perhaps the most important reason why Ford Page 2 Ford Motor Company—what’s it worth? did not go bust is that is that it has a profit- on Ford’s balance sheets in their published able Financial Services business. (See Table annual reports or SEC filings. Automotive and 1). Financial Services are consolidated and all fig- ures are in $ Millions. Income from Ford Credit (FC) in the period 1999 to 2007 added up to $22.5 Billion, The firm survived bankruptcy because it gen- which covered three-quarters of the losses erated cash from three sources: it received made on automotive. More importantly, it has almost $30 Billion of extra long terms loans; it been FC’s ability to raise corporate bonds and sold off over $9 Billion is assets; and it man- – since 2006 – to act as the conduit to sell off aged to slow payments to suppliers that gave it Ford’s asset backed securities that has en- access to another $9 Billion or thereabouts. In abled the automotive division to keep invest- total, balance sheet changes gave it access to ing cash in the next generation of products. $47.7 Billion. Ford Share Price: May 1998— May 2008 The stakes couldn’t be higher for Ford. In How did it use this cash? Roughly, $26.5 Bil- December 2006, the company raised its bor- lion went to finance stocks and cash, while the rowing capacity to about $25 billion, placing rest, $21.2 Billion, was used to fill the hole all its corporate assets as collateral to secure made by losses in equity. Keep in mind, the the line of credit. It has literally “bet the $2.61 Billion generated from selling assets, “How did the farm” on its turn-around strategy. which also was also swallowed up. business survive Keep in mind that the turnover of profitable Was all of this helpful to shareholders? Ford Credit has shrunk by 40% since 2001 – such a difficult while the loss-making automotive business Yes, in the sense that a forced sell-off might period in its 105 keeps growing by 3% a year. Fortunately, have destroyed even more shareholder value. the profitability of the financial services busi- However, shareholders certainly lost heavily in year history? ness stayed positive, although volatile. The this period. In 1999, shareholders equity was Surely, most firms unanswered question is whether Ford auto- valued at $28.3 Billion on the balance sheet. motive could ever rely on such a “cash cow” But, in terms of the ‘market capitalization’ would have gone in the future. The Ford Credit operation has (Number of issued shares x share price), the bust or been taken had a difficult time accessing capital at eco- equity was worth $37.5 Billion. Today’s market nomical rates because of the company's Ford Motor Company Sources and Uses over?” downgrading to ‘junk bond’ status and re- 1999 vs 2007 mains weakened so long as its parent is 40000 29,791 weak. 30000 Sources 20000 Balance Sheet Funds Flow: Uses 8,940 9,033 1999 to 2007 10000 0 Current Assets Current Liabilities Fixed & Financial Long Term Debt Total Equity Assets While it’s traditional for financial analysts to -10000 focus on ratios, the survival of Ford has been -20000 based on managing its cash position from one -21,230 -30000 -26,534 period to another rather than achieving a quick breakthrough in profitability. capitalization is $15.04 Billion, so shareholders Table 2 and the graph opposite summarise have really lost almost $22.5 Billion since 1999 the changes at Ford between 1999 and 2007. – and that omits the dividend payments fore- It’s a simplified funds flow statement based gone. Table 1: Net Income 1999 2001 2002 2003 2004 2005 2006 2007 Before Taxes ($Millions) Automotive 7,275 -8,857 -1,153 -1,908 -155 -3,899 -17,040 -4,970 Financial 2,579 1,438 2,104 3,247 5,008 4,953 1,966 1,224 Services Consolidated 9,854 -7,419 951 1,339 4,853 1,054 -15,074 -3,746 LGA White Paper © Page 3 Operating Cash Flow 2001 - 2007 Table 3 All sums in $ 2001 2001 – 2007 2001 -2007 2007 Millions Opening Sources Uses Closing So, moving funds around the balance sheet, Cash Cash helped Ford to stave off bankruptcy, but where Opening Cash 4,776 is the money coming from to finance the turn- Cash from 129,199 around? Operations Invested in the 63, 806 The Ford family don’t have enough and the Business rest of the shareholders have lost a packet. Cash 38,734 Anyway, who would finance it with the Ford (Used)/Provided from Financing family still in control? Cash from 3,447 Hedging, The Operating Cash Flows show how Ford Discontinued Ops, etc solved this problem as well. Table 3 gives a simplified Operating Cash flow based on Ford’s Closing Cash 34,882 Annual Reports for the period 2001 - 2007. The business itself generated $129. 2 Billion, primarily from Financial Services, creditors, voting rights. asset sales and so on during this period. Back in 1999, the family shares were worth Of this, $63.8 Billion was re-invested, the bulk around $3.86 Billion. Since then it has shrunk – almost $50 Billion going into Capital Expendi- to $584 million – just as much pain as a stan- “ The Ford Family ture, mostly for new factories and new prod- dard shareholder, but the losses are significant ucts. Another $38.7 Billion was used to pay in another way. Much more importantly, the own 3.3% of Ford back short-term debt. What was left over – “B” shareholders benefited from around $130 by value, but have plus another $3.5 Billion of FX profits and cash million a year in dividends, discontinued since from discontinued operations – was all added 2007. So, not only have the family lost a lot of 40% of the voting to the cash reserves.