Ford’s Focus

If the company starts making profits again, it won’t be from selling cars.

Today, it costs less to buy a share of Ford—the venerable company that introduced the Model T, the assembly line, and the $5 day—than it does to see a movie. And that’s after the stock rallied from an 11-year low on Tuesday. This is hazardous territory for a blue chip.

Amid a skein of bad news, there’s a widespread sense that things are breaking down, even as Ford prepares for its 100th anniversary festivities in June. And things don’t look promising for Ford CEO William Clay Ford Jr., who is blessedwith good auto bloodlines (he counts both Henry Ford and Harvey Firestone among his great-grandfathers) but poor timing.

In January Ford briefly posted incorrect financial data slides on its Web site just as investors were preparing to view results. In an embarrassing episode that resonated with a public skeptical about corporate governance, the CEO recently agreed to give up profits on the 400,000 shares of Goldman Sachs’ initial public offering that he received. (Since 1996, Ford had paid Goldman $87 million in banking fees and Goldman executive John Thornton sits on Ford’s board.) Earlier this week, Ford had to reverse a decision by chief operating officer Nick Scheele to have the London-based advertising agency WPP Group handle all its advertising: Scheele, the former chairman of Ford Europe, is friendly with WPP’s head, and his son works at a WPP unit in New York. In January, Scott Hill, an analyst at Sanford Bernstein, cheekily noted that even if the Ford family sells the hapless Detroit Lions, it would own “a franchise still capable of ill-timed fumbles and gaffes.”

That’s all in the realm of perception. But the reality of the company’s performance doesn’t look so hot, either. Ford lost $980 million last year after a $5.4 billion loss in 2001. At times, some of its bonds have traded at junk levels. Ford’s U.S. market share has slumped to about 21 percent today from 26 percent in 1995. Under the stewardship of the 45-year-old Ford, whom Fortune dubbed “the not-quite-ready-for-prime-time CEO,” the company couldn’t turn a profit during a time of record sales and low interest rates. And so analysts wonder what will happen if the economy slows further or if car sales revert to their historical mean. Independent bond analyst Sean Egan this week suggested that the company would already be bust if not for the value of the Ford name.

But while Ford may be in the breakdown lane, it’s not destined for the scrap heap just yet. The lion’s share of the company’s mammoth debt load is shouldered by Ford’s still-profitable financing arm, Ford Credit, not by the manufacturing operation. And the company may be too big to fail. Sure, Washington has been pretty much oblivious to the bankruptcies of entire industries (viz. airlines, steel, telecommunications). But in this instance, the support is likely to come from Wall Street. In the midst of this lengthy slump, Ford Credit, which routinely issues bonds backed by lease and loan payments, has been one of the steadiest suppliers of commissions and fees.

Indeed, Ford today is really a marginally unprofitable auto manufacturer attached to a modestly profitable bank. In the first nine months of 2002, the car-making unit, Ford Motor, had a $306 million operating loss on $100 billion in revenues; Ford Credit earned $1.5 billion in the same time period.

William Ford has made some progress since embarking on the Soviet-sounding five-year Revitalization Plan in January 2002.Last year, the company reduced costs per vehicle by about $240, slashed overhead, and sold assets. In February, the Ford F-Series pickup was the top-selling vehicle in the United States.

But even so, Ford doesn’t plan on making any money selling cars to its vast network of dealers this year. (All the projected profits from 2003 will come from the finance unit.) And on March 3, Ford said that its second-quarter production schedule would be “notably lower” than the second quarter of 2002. Meanwhile, consumers have become accustomed to the no-interest loan programs and heavy rebates that proliferated after Sept. 11, 2001. In February, according to CNW Marketing Research, Ford’s per-vehicle incentives were an average of $3,543.

Now, Ford does have a ton of debt. Ratings agencies Standard & Poor’s and Moody’s have appropriately lowered Ford’s credit rating in the past year and have expressed concerned about further deterioration. But they haven’t slashed the ratings to the point where the company will have difficulty getting loans. That’s because most of the debt rests on profitable Ford Credit. As of last Sept. 30, Ford Motor had $13 billion in long-term debt, while Ford Credit reported $148 billion in debt. Meanwhile, the automotive unit had $25 billion in cash or cash equivalents last fall. As Ford told Fortune, “It would take us a long time to burn through that—many, many years. And if we don’t get our act together by then, then we don’t deserve to survive.”

Of course, Ford Credit couldn’t function as a stand-alone business. It makes money only by lending to people who purchase Ford cars or by selling bundles of leases to investors. If sales of the Taurus or Explorer continue to decline dramatically, Ford Credit’s profits will fall. But while anemic and trending lower, Ford’s sales figures aren’t sufficiently dire to merit talk of bankruptcy.

At the gala centennial celebration in June, Ford will feature a car from every year of its storied history. (Presumably, 1958 will be represented by something other than the Edsel.) The lineup will provide an excellent overview of the products that spun out billions in profits in the 20th century. But if the company wants to offer Ford fans a glimpse of the profit motors for the next few years, it should consider mounting an exhibition of spreadsheets and amortization tables.