Financial trends and economic patterns

¶ … auto industry is generally characterized by immense fixed costs, strong labor unions, strict regulation, tough competition, and volatile demand. There are times when even extremely strong car manufacturers find it difficult to overcome these forces. Investors looking for an easy profit should definitely look somewhere else. Even prudent investors should worry about the fundamentals of the auto industry.

Ford led the U.S. manufacturers in the 1980s in the commercial war against the Japanese by selling truck-based products to car owners. The fact that Americans prefer large vehicles and that large vehicles are what U.S. automakers do best is no surprise to anyone. Helped by favorable fuel-economy and emission legislation for trucks, Ford dominated the trucks and SUVs market for years. The most profitable segments of the market were occupied by Ford for more than a decade.

However, one recent financial trend Ford experienced is the loss of 7 percentage points of market share, due to the fact that its products are aging and that the truck segment became more and more competitive. The management couldn't face the new circumstances, and now the company suffers as a result.

Another noteworthy financial trend is the constant rise of the company's debt, especially toward its retirees. The pension and benefit plans were underfunded by almost $45 billion. Although the debt has various maturities, its evolution is unpredictable on the long-term and analysts consider that it represents a huge problem.

One financial trend affecting the company's operations is the loss of profits due to the loss of market share, which is, in turn, caused by high fixed costs. Demand is not at all constant, so sales are maintained by lowering prices. However, it seems that General Motor has had better rebate policies and Ford wasn't up to the challenge, so the price drops reflected in a shrinking of profitability.

CEO Bill Ford Jr. was an excellent asset for the company, as better deals with suppliers and cuts in fixed costs were performed. Although several plants were lost and the manufacturing capacity in North America was reduced gross margins are on the rise as Ford Motor enters an era of acute savings. Short-term liabilities are not that scary, especially since the company has serious amounts of cash. However, Morningstar analysts estimate that, although Ford isn't facing bankruptcy for the moment, the situation could change, provided that the fundamental ratios of the auto industry remain at the same levels and are accompanied by declines in demand.

As far as ratios are concerned, the last five years were not that great for the company. The debt / equity ratio varied a lot during this period. After a value of 5.67 in 1999, the ratio recorded a steep climb to 9.12 in 2000 and than worrying values of 22.09 and 30.07 in 2001 and 2002, respectively. The company's board managed to reduce the pressure in 2003, and that value was reduced even more in 2004: 15.71 and 10.78, respectively. Latest quarter results show constant figures: 10.29.

The current ratio was not that impressive. After a slight drop in 2000 and 2001 (0.81 and 0.76, compared to 1.02, as recorded in 1999), the current ratio went back up to 1.01 in 2002 and 1.10 in 2003. Latest quarter figures maintain the same level -- 0.98

Growth rates aren't constant at all. After recording a 12.6% increase in 1999 and a slighter one in 2000 (4.6%), the growth rate for 2001 was negative: -4.5%. Insignificant pluses were achieved in 2002 and 2003: 0.6% and 0.5%. 2004 was a good relatively good year for the company, with a growth of 4.5%, considering the poor business environment of the automotive industry. The figure for the latest quarter (1%) indicates that 2005 would also be a good year for Ford, depending on the various circumstances.

In my opinion, Ford should first of all try to define its competitive advantages. The price of oil is going up each day, so counting on fuel-expensive vehicles for growth isn't a sound solution. Perhaps Ford should try to find a new market segment for its products, such as business-oriented individuals.

One other problem Ford has to face is the one of its huge debt. Unless the management at Ford finds some solutions to this issue, the company faces the plummeting of the price of its shares. Investor confidence is already low, so further challenges are not at all advisable.

Another issue would be the continuation of the price war with the other Detroit manufacturers. Demand is already low, so Ford should probably concentrate on the high-end sector, which is less affected by variations in demand and which could contribute significantly to the increase of its margins.

With regard to the danger of misleading financial statements, I have found an article by John Taylor, entitled "Allegations of Accounting Missteps Can Hurt Trust" and published in the "Knight Ridder Tribune Business News" (Washington: Jan 14, 2002). In short, The SEC accused two former officials of Inacom, a company formerly based in Omaha, of hiding the company's real financial condition from shareholders. The SEC found that the executives had lied to auditors, thereby inducing massive financial losses.