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Ford beats analysts' expectations

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Ford beats analysts' expectations

Automaker is on road to investment grade status; sales on rise

Alisa Priddle / The Detroit News

Dearborn— Ford Motor Co. continues its march to investment grade status, thanks to strong third-quarter earnings, more whacking of its debt, improved pricing on an increasingly strong product lineup and plans to increase production and jobs.

Ford exceeded analysts' expectations with third-quarter sales of $1.7 billion — up 68 percent — and announced three separate debt reduction moves, including final payment to the retiree health care trust on Friday.

The strong financial news coincided with a Consumer Reports survey showing Ford products are the most reliable of the domestic automakers.

Dearborn-based Ford's sixth straight quarterly profit came a day after it announced an investment of $850 million to create up to 1,200 jobs in at least four Michigan plants by 2013.

"They are going gangbusters," said analyst Rebecca Lindland of IHS Automotive in Lexington, Mass.

The only thing missing is those final two rungs it needs to climb to be rated investment grade.

Standard & Poor's Ratings Services said Tuesday the results "may support a higher rating" if Ford is able to generate at least $4 billion in cash next year in its global auto operations and sustain profit margins in North America and Europe.

In reporting its highest third-quarter net income since 1990, Ford was profitable in all regions but Europe. Chief Financial Officer Lewis Booth said every operation will be profitable in the fourth quarter and remain in the black through 2011.

Moody's Investors Service raised Ford's credit rating two levels this month but indicated further upgrades are unlikely until the conclusion of contract negotiations with the United Auto Workers next fall.

Stephen Brown, senior director at Fitch Ratings in Chicago, said Ford's performance is impressive, but ratings also consider external factors such as the slow rebound of the auto industry and regulatory requirements. Fitch upgraded Ford in August and made no changes Tuesday.

Citi Investment Research & Analysis on Tuesday said it would maintain its "hold" rating on Ford, citing continued uncertainty in the U.S. economy, labor relations, a distressed supply base and commodity prices.

Booth said the agencies may need to see a longer track record before acting. Ford also may be running up against a trust issue with Wall Street that tends to hold the auto industry to a higher standard, Lindland said.

In the interim, Ford will continue to focus on its own agenda that includes debt reduction.

"The valuation of the company will follow the improvements in the balance sheet," Booth said.

He dismissed any suggestion that General Motors Co.'s preparations for an initial public stock offering are putting pressure on Ford. But Lindland said Wall Street tends to view companies by sector and the actions of one affects its peers.

Booth said debt reduction is the automaker's priority. Significantly, Ford will have as much cash as debt by year's end, achieving that target a year ahead of schedule. The last time the company was net cash positive was second-quarter 2008.

Ford announced three separate debt-related actions: A $2 billion mid-September pay-down of a line of credit.

On Friday, Ford will make the final $3.6 billion cash payment to the retiree health care trust fund that is due in 2022.

And Ford is making conversion offers on two convertible debt securities. The offers will close Nov. 23.

In all three cases, Ford is using cash to shed debt. Ford ended the second quarter with $21.9 billion in cash and $27.3 billion in debt for net debt of $5.4 billion.

At the end of September, cash was up to $23.8 billion and debt reduced to $26.4 billion, for net debt of $2.6 billion.

As of Friday, Ford will have reduced debt by $10.8 billion from $33.6 billion at the end of 2009. On an annualized basis, that translates into a savings of $800 million in interest costs.

Booth did not rule out further debt reduction in the fourth quarter, as Ford works to level the playing field with GM and Chrysler Group LLC, both of which used bankruptcy to shed debt. Ford borrowed $23 billion in 2006, which provided the cash cushion it needed to avoid bankruptcy.

For its part, Ford notched a 68 percent increase in third-quarter net income as the automaker has increased its share of the U.S. auto market to 16.7 percent — up 1.5 points from a year ago — and buyers paid more for its highly rated cars and trucks.

Net pricing for the quarter improved by $400 million from a year ago. The increase in net pricing is a combination of consumers buying higher-end models and Ford reducing incentives slightly, Booth said.

"Many of Ford's latest products can sell at even higher transaction prices thanks to popular and profitable additional features," said James Bell of Kelley Blue Book in Irvine, Calif.

"The last time Ford looked so good, industry volume was much higher and Ford was selling many more big-ticket trucks and SUVs," said Shelly Lombard, analyst at Gimme Credit research service. With its lower cost structure, Ford can make money at lower volumes with a sales mix less reliant on trucks and SUVs.

"Overall, we are doing better than we expected to in the first nine months," said Alan Mulally, Ford's chief executive.

From The Detroit News: http://www.detnews.com/article/20101027/AUTO01/10270366/1148/auto01/Ford-beats-analysts’-expectations#ixzz13YvoZaM6

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