Ford Motor Company (F): This Company’s Stock, One Serious Problem

Cancer is deadly for many different reasons. For one, it often lies undetected, while causing bodily harm for a lengthy amount of time. Ford Motor Company (NYSE:F) has a similar problem, one that doesn’t fully show up on the balance sheet or financials and often goes unknown among investors: an underfunded pension.

Ford Motor CompanyIt’s important that investors are aware of this issue, and since the underfunded pension can be a little complicated, I’ll explain it step by step, tell you how it could be turned into a positive, and what Ford’s plan to tackle the problem is.

Grasping the size
To give you a sense of how large the underfunded pension issue is, since it doesn’t fully show up as a number on the financial sheets, I’ll compare it to automotive debt, as both are obligations due from the company.

Ford Motor Company (NYSE:F)’s roughly $86 billion in total debt is misleading, because that includes the financial division, where it takes on huge loans at low interest rates and dishes the money out to consumers for financing. The profit in this sector nearly offsets Ford’s losses in Europe. So if you take out the financial division, which adds approximately $72 billion of debt to the books, you find that Ford’s real automotive debt sits at about $14 billion. Remember that number.

In contrast, it’s estimated that Ford’s pension is underfunded by about $18.7 billion. That’s more than its automotive debt, and it’s only about $6 billion shy of the massive $23.4 billion private loan it took out (and eventually paid back) before the recession hit. Ford put up its legendary Blue Oval as collateral on that loan. It’s a big number.

Now, don’t panic, Let’s look at why this pension number is so large, how it will change going forward, and what Ford is doing about it.

What inflates the number
Low interest rates are supposed to be a good thing. They certainly allowed Ford Motor Company (NYSE:F) to borrow money cheaply and use it to offer discounts to help sell cars or other company interests. But these rock-bottom rates also inflate the underfunded pension number, because they cause Ford to lower its discount rate, which essentially defines how large pension requirements need to be. Ford had to lower its rate from 4.6% to 3.84%, appearing to wipe out any progress it made on paying into the pension funds over the past year.

But hang in there, There is good news, too!

From debt to surplus
Let’s say that in eight years, the housing market has steadily improved, the automotive market has been healthy, the economy is more stable than ever, and politicians are working together in harmony. Well, OK, scratch the part about the politicians. Anyway, imagine, too, that interest rates have risen for the past few years and the discount rates have followed. This hypothetical situation would significantly change the look of Ford’s underfunded pension. It would narrow the gap, and it’s possible that if Ford had been diligent in paying into the fund, the company could actually be looking at a pension surplus! This is a real possibility, and can you imagine how the stock price would react if it happened?

Bottom line
Back here in the real world, interest rates are likely to be low for at least two years, so what is Ford doing now to fix this issue? In 2012 it paid $3.4 billion into the fund. It’s been executing a plan to offer buyouts to salaried workers, which knocked off about $1.2 billion in obligations. And it’s committed to putting $5 billion into the fund this year, with plans to have a fully funded pension by mid-decade.

If Ford Motor Company (NYSE:F) handles this underfunded pension just as it dealt with its pre-recession loan — which, again, is now paid off — this goal is certainly achievable. If discount rates rise, even a surplus is possible. Either way, the issue should be much easier to deal with in the future. I’m bullish on the automotive industry and its companies, and I’m especially bullish on Ford.

The article Ford’s Stock: One Serious Problem originally appeared on Fool.com.

Fool contributor Daniel Miller owns shares of Ford. The Motley Fool recommends and owns shares of Ford.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!