However, there is a very, very important benefit to Ford resulting from rising rates in the form of reduced pension shortfalls. At the end of 2012, Ford’s pension plans were underfunded by a staggering $18.7 billion (an increase of $3.3 billion from the prior year). You may ask how this could possibly be good news. Well, the calculation of projected pension liability is heavily influenced by an interest rate assumption that is highly sensitive to fluctuations in current market rates.
As noted on slide 13 of an insightful Ford management presentation, a 1% increase in interest rates translates into a $2.3 billion reduction in the pension plan’s shortfall. As a result, it is quite reasonable to expect a multi-billion dollar reduction in the pension shortfall in 2013, which can translate into cash previously earmarked for pension contributions being used for further investment in growth opportunities, dividend increases, share repurchases, or debt reduction.
The investment thesis remains strong
Ford Motor Company (NYSE:F) continues to create innovative vehicles that are well-received by the public. In combination with growth efforts abroad, stabilization in Europe, and further efficiencies stemming from the company’s One Ford standardization initiatives, there are strong indications that the company can continue to gain market share.
There is no doubt that competition will remain fierce around the world, but June’s 3% decline in domestic Camry sales and 5% decline in Prius sales are solid indicators that Ford is making headway against competitors like Toyota. GM remains the leader in auto sales domestically, but Ford’s current trajectory has the company on pace to catch GM in a couple of years. While the recent results have been encouraging, it is important to appreciate the fact that GM, Toyota, Honda and others in the industry are formidable competitors with pipelines full of new vehicle models. This can be clearly seen in the recent success of Honda’s Accord, which has reported an increase in domestic sales of 20%.
Ford Motor Company (NYSE:F) is an excellent opportunity for a “buy what you know” investment; in fact, my personal investment in Ford came shortly after buying a Ford just over a year ago and being strongly impressed by the lineup of vehicles. I encourage anyone considering an investment in Ford (or any other automaker) to do some first hand research to validate the investment thesis.
The article Ford Remains a Great Investment Opportunity originally appeared on Fool.com and is written by Brian Shaw.
Brian Shaw owns shares of Ford. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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