Ford Motor Co

Rating: Ba2/ BBIndustry: Automotive Name of analyst: Abhishek Namilikonda

Section 1: Investment Summary/ recommendation: Ford can be initiated with a stable credit outlook. This is evident from the significant progress

made in strengthening its balance sheet in recent times. The company has reduced Automotive debt by $14.5 billion in 2010, a 43% reduction, resulting in lower annualized interest expense of about $1 billion. Over the next few years, Ford will use its free cash flow to pay off significant amounts of debt. Despite the debt reduction, the firm still has meaningful obligations, including more than $7 billion of debt coming due in 2013 and also the pension obligations remain substantial. Although the firm's good cash flow reserves together with its very large cash balance might cushion this. The company needs to constantly look for methods of improving liquidity at least for the next 3 years. With the help of continued progress towards One Ford Plan and with aggressive investment in Emerging Markets and in new technology, Ford plans to strengthen its cash flows and provide further cushion to its liquidity and debt position.

Section 2: Business & industry overview: The auto industry is a highly concentrated one, with roughly 10 global automakers accounting
for over 77% of total production worldwide. Ford Motor Company is the world's fourth largest automotive manufacturer by production volume. In 2010, General Motors led the scores with a 19.1% market share in the U.S., followed by Ford Motor with a 16.4% and Toyota Motors with a 15.2% market share. As the developing world has grown wealthier and higher energy prices have universally increased demand for better fuel economy, Fords current strategy seeks to produce fewer automobile models that can be sold across the globe with few modifications. Ford has improved its fuel economy more than any other major

United States automaker. As a result of its efficiency improvement programs, Fords fleet wide emissions at 270 g CO2/km in 2009 have improved more than any other auto maker. During the time of crisis throughout the auto industry in recent years, Ford emerged as the sole American automaker in a position to survive the steepest sales downturn in decades without a government bailout. That helped the company improve its reputation and win new customers. This is evident from increase in Fords unit sales by 19% (Above the Industry growth of 13%) to 1.94 million vehicles, while sales of GM and Chrysler grew 7% to 2.22 million vehicles and 17% to 1.09 million vehicles during the year, respectively. In 2010, global industry vehicle sales volume increased by 13% to reach 73.9 million compared to FY 2009. Despite all the growth and positive factors and inventions, Automotive industry suffered with many set backs in the recent years. One of the major set back was Recalls by OEMs. Automotive safety recalls were brought into focus by Toyotas recalls in late 2009. Later, Ford recalled nearly 600,000 vehicles throughout 2010 and more than 1 million vehicles in 2011-till date. The 2011 recall included 507,000 units of F-150 pickups and 525,000 units of its Windstar minivans due to a corrosion related problem.

Section 3: Management strategy Management expects continued improvement in 2011, driven primarily by product

strength, a gradually strengthening global economy and an unrelenting focus on improving the competitiveness of the Company. I agree with this view of management, looking at the recent performances, technology developments and the strategy at which Ford is working out its supplies with demand the company is expected to do well in 2011. The implementation of new EcoBoost family of gasoline engines is well underway and a major part of companys sustainability strategy, delivering both exceptional fuel economy and performance. European ECOnetic range of ultra-low CO2 diesel models across small to mid-size car and commercial vehicle segments continues to build on the success started with the 2008 Focus ECOnetic. As the U.S economy moves towards recovery, the management anticipates U.S. industry sales volumes to increase from 11.8 million units in 2010 to the range of 13 million to 13.5 million units this year. Ford should be able to tap in majority of share in this growth, with its latest offerings. However, production for the coming few months could take a hit citing Japan supply disruptions resulting in short term plant shut down (outside Japan). One advantage for Ford is, it has no plants in Japan but uses suppliers based there. However, due to the shortage of spares, resulting in plant shutdowns the company said it was looking for alternate sources of auto parts as necessary. Emerging markets such as China, India, Brazil and Turkey, are forecasted to witness strong growth offering the company significant sales volume opportunities. As other OEMs, Ford has implemented and plans to implement different strategies to tap these markets. The largest segments in these markets are small vehicles. The best example of Fords success in these markets is the launch of Ford Figo. To increase participation in fast-growing markets like Russia, China and India, the company is increasing its production capacity significantly, directly and also through joint ventures. As a part of its One Ford plan, the company continues to aggressively restructure its profitability to suit current demand and changing model mix, accelerate development of new products and improve the health of its balance sheet.

Section 4: Business outlook / Prospects: Traditionally, Ford's most profitable vehicles have been large SUVs and pickup trucks.

However, volatile oil prices and political pressures for more fuel-efficient cars have taken a toll on the market for these larger vehicles. As a quick fix, Ford announced plans to retool three manufacturing facilities formerly used to produce trucks to instead make six of its more fuel efficient European models in the US. This offers the advantage of quickly bringing highly demanded fuel efficient cars to the U.S. market without having to invest the money and time to create an entirely new automobile. The company is also embracing lower tech solutions such as low resistance tires and 6-speed automatic transmissions that improve fuel efficiency over transmissions with fewer gears. These 6-speed transmissions allow the engine to rev at more efficient levels and improve fuel efficiency by 4-6% over the 4 and 5 speed transmissions currently installed on most Ford vehicles. Ford hopes to build 98% of its vehicles with six-speed transmissions by 2012. Geographically, Ford has historically

maintained a heavy North American focus. However, North America's once-significant lead on international unit sales has all but disappeared and more importantly, growth in cars sales in the BRIC (Brazil, Russia, India & China) countries continues growing quickly. How Ford manages to take advantage of this trend will be decisive to the company's long term growth. Also, supply disruptions stemming from the earthquake in Japan could hurt Ford's earnings for the fiscal 2011. As a part of restructuring its strategies, Ford was able to slash capacity, renegotiate healthcare, divest non-core brands, cut debt, and preserve valuable tax assets, all items that were easier to do with the US government and United Auto Workers (UAW) more accepting to preserving the company rather than dealing with another bankrupt automaker.

Section 5: Financial analysis Ford increased its FY 2010 sales by 10.9% to $129.0 billion compared to $116.3 billion for

the FY 2009, but were down by 10.2% from FY 2008 revenues of $143.6 billion. Segment wise, Automotive sales increased by 14.8% to $119.3 billion in 2010 from $103.9 billion in 2009, primarily because of higher volumes and favorable net pricing, offset partially by lower Volvo sales reflecting the sale of Volvo on August 2, 2010. Automotive market share in US for 2010 increased by 1.1 percentage points to 16.4% compared to 15.3% in 2009. Financials services revenues decreased by 22.1% to $9.67 billion during the FY10 compared with $12.5 billion during the previous fiscal. This was due to discontinuance of financing for Jaguar, Land Rover, Mazda and Volvo and lower industry volumes in recent years. Gross profit for 2010 increased by 19% to $24.5 billion compared to $17.4 billion for 2009. The improvement in results primarily reflects favorable volume and mix, net pricing, offset partially by unfavorable cost changes. As a result, gross margin increased to 19% in 2010 from 15% in 2009. Due to continued cost reduction efforts and increase in revenues generated, EBITDA margin increased to 14.1% during the fiscal 2010 from 9.4% during the fiscal 2009. The company improved its bottom line with a record net income of $6.56 billion 2010 as against income of $2.72 billion in 2008 and a loss of $14.8billion in 2008. Ford exited the FY 2010 with $35.6 billion in cash and short term investments as against $42.3 billion at the end of fiscal 2009 and $39.5 billion at the end of FY 2008. Cash generated from operations decreased to $11.5 billion in 2010 from $15.5 billion in 2009, but improved from cash used of $263 million for 2008. Working capital decreased to $70.4 billion (2009: $87.2 billion) representing a current ratio of 2.17 (2009: 2.44 times) as on December 31, 2010. Decrease in current assets was mainly due to decrease in cash & cash equivalents and accounts receivables. Total debt at the end of FY 2010 decreased to $104.0 billion compared to $131.6 billion at the end of FY09. Net debt decreased by 23.4% to $68.4 billion from $89.4 billion as on December 31, 2010. Debt to equity stood at a negative of 154.5 at FY10 end as against a negative of 16.8 at FY09 end. Debt to capital ratio stood at 1.01 as against 1.06 at the end of previous fiscal.

Section 6: SWOT Analysis:

Strengths o Strong brand portfolio o Strong engineering capability Weakness o Large unfunded pension and other obligations o Weakening North American automotive operations Opportunities o Opportunities in Emerging Markets like India and China o Launch of new models Hybrid vehicles and Increasing demand for dual fuel vehicles Threats

o Economic slowdown in the US and Euro zone

Japan Crisis Shortage of auto parts faced once the inventory balance runs out. Ford has suppliers based in Japan who were hit by recent earthquake.