Ford May Lose $3 Billion in North America

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Ford May Lose $3 Billion in North America, People Say (Update5)

July 14 (Bloomberg) -- Ford Motor Co., buffeted by declining sales, shrinking margins on its most profitable vehicles and a dire need to conserve cash, may lose $3 billion in North America this year, people familiar with the company's internal projections said.

The pretax loss would be almost twice the $1.6 billion Ford lost in its North American auto business last year and higher than analysts' projections of a deficit as big as $2.5 billion. Moody's Investors Service today lowered its Ford debt rating further into junk status, citing ``considerable additional stress'' on the automaker in the region.

The unexpectedly poor performance threatens Chief Executive Officer William Clay Ford Jr.'s corporate turnaround plan announced six months ago, which banks on the North American auto operations being in the black by 2008, largely through job cuts and new, better-quality vehicles.

A wider loss in North America would make it ``imperative that Ford accelerate its cost-cutting activity and product launches,'' said Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tennessee.

Ford spokesman Tom Hoyt declined to comment. The company, the world's third-largest automaker, stopped providing earnings guidance to analysts in January.

Analysts still expect Ford to post an overall profit for the year excluding one-time costs, as it did last year, thanks to its Ford Motor Credit unit, which earns more by lending money to buy cars and trucks than Ford does making them.

Bill Ford, the great-grandson of the company's founder, in January pledged to restore profit in North America by cutting 30,000 jobs by 2012 and closing 14 manufacturing facilities.

Shares Slide

Investors are skeptical. Ford shares have dropped 18 percent this year, following a 47 percent plunge in 2005, and reached a 13-year low of $6.17 last month. The shares of General Motors Corp., the world's biggest automaker, have jumped 46 percent this year, buoyed in part by a possible alliance of GM with Nissan Motor Co. and Renault SA.

Ford shares fell 18 cents, or 2.7 percent, to $6.38 in New York Stock Exchange composite trading at 3:12 p.m. The company yesterday said it was cutting its dividend in half to conserve cash.

Moody's Downgrade

Moody's reduced its Ford corporate and senior unsecured debt ratings two levels to B2, or five levels below investment grade. It also cut the Ford Motor Credit finance unit one level to Ba3, or three levels into high-risk, high-yield junk status. The changes affect $110 billion of debt, Moody's said.

The downgrade ``reflects Moody's expectation that the company's performance in North America will face considerable additional stress due to high fuel prices and the resulting shift in consumer preference away from the very profitable SUV segment,'' the ratings company said in a statement.

Ford's 7.45 percent bond due July 2031 traded at 71 cents today, down from 83 cents a year earlier. The yield was 10.83 percent, up from 9.18 percent. Credit derivatives dealers yesterday were asking for as much as $895,000 a year, up from $869,000 the day before, to insure $10 million of Ford debt against default for five years with credit-default swaps.

According to people who have seen Ford's North American projections, losses are mounting because of a continued slide in sport-utility vehicle sales and a drop this year in sales of F- Series pickup trucks.

Market Share

Because of the profits on the light trucks, which offset losses on most passenger cars, Ford was able to make money in North America as recently as 2004, even as its share of the U.S. vehicle market continued to slide. Ford's market share was 18.4 percent in this year's first half, down from 25.7 percent in 1995, the last year its share rose.

Just 18 months ago, Ford had targeted a North American profit of $1.4 billion to $1.7 billion for last year. The region ended the year with the $1.6 billion loss as sales of the Explorer, the nation's best-selling SUV, plunged.

Explorer sales tumbled 29 percent in the first half of 2006 from the year-earlier period, while sales of the larger Expedition SUV dropped 31 percent.

Ford has been offering discounts and other incentives that are eroding profits. As recently as 2004, Ford generated about $8,000 in pretax earnings on mid-size SUVs and $11,000 on large models, said David Healy, a Burnham Securities analyst based in Sierra Vista, Arizona. Because of the discounts, Ford may not be making any profit on SUVs, he said.

Pickups Squeeze

A similar squeeze is hitting the F-Series pickups, which account for one of every four vehicles Ford sells in the U.S., the people familiar said. F-Series sales fell 1.9 percent in the first half, including a 9.7 percent drop in June. Ford is now offering no-interest loans of up to five years on the F-150, which accounts for 60 percent of the line's sales.

Healy had estimated Ford's North American auto operations would lose $163 million this year. The incentives caused him to change his forecast this week to a loss of $1 billion.

Jon Rogers, a Citigroup Investment Research senior analyst, in May forecast a $2.5 billion loss for Ford in North America this year. His report cited, in part, ``an aging product portfolio'' and ``over-reliance on light trucks for profits.'' Michael Bruynesteyn, a Prudential Securities analyst in New York, in April predicted a $1.9 billion North American loss.

Analysts' Forecasts

The range of analysts' forecasts for the year has widened since Ford stopped giving guidance. An average of 15 analysts surveyed by Thomson Financial shows Ford is expected to report a 2006 profit of 45 cents a share, versus last year's $2.5 billion excluding one-time costs, or $1.28 a share. Estimates vary from 15 cents to 71 cents and exclude costs of plant closings, layoffs and employee buyouts.

Analysts also expect Ford to report a profit, excluding one-time costs, when it releases results for the second quarter on July 20. The North American auto unit is expected to post another loss. It lost $457 million pretax in the first quarter.

Ford won approval yesterday from the U.S. District Court in Detroit to implement a health-care agreement with the United Auto Workers union that the company expects will save $850 million a year, spokeswoman Marcey Evans said. Union members ratified the accord in December.

Bill Ford is trying to reduce the company's reliance on SUVs and pickups by adding car models such as the Fusion, Mercury Milan and Lincoln Zephyr. The company's U.S. car sales rose 5.3 percent in the first half.

Merrill Lynch analyst John Murphy is unimpressed. He expects Ford ``to continue to lose market share, potentially at an accelerating rate over the next few years,'' Murphy said in a July 11 report. Murphy, who rates the shares a ``sell,'' said Ford ``is underspending on product and its lineup is dominated by one platform, the F-Series.''


To contact the reporter of this story:
Bill Koenig in Southfield, Michigan wkoenig@bloomberg.net;