Even with Ford Motor Company (NYSE:F)’s surge back to relevance and profitability, a substantial amount of bears remain out there. That’s fine. I understand that there are significant risks investing in Ford. That said, I haven’t seen too many thorough bear arguments, and some are flat out portrayed incorrectly, such as Ford’s debt problem. I decided to collect the bear arguments I hear most often and refute them because I consider the arguments weak, at best. Let’s start off with the one I consider most damaging, because of investors’ misunderstanding.
I can’t count how many times I hear newer investors who, bless their hearts for trying, see the large debt number on Ford’s balance sheet and scream in horror. When investors see Ford’s debt-to-equity ratio is 3.8 compared with Toyota Motor Corporation (ADR) (NYSE:TM), Honda Motor Co Ltd (ADR) (NYSE:HMC), and General Motors Company (NYSE:GM) at 0.55, 0.45, and 0.33, respectively, it causes them concern.
I understand that seeing more than $90 billion in debt is a cause from concern, but in Ford’s case it isn’t. Let me explain. The debt you need to be worried about is automotive debt, which represents only roughly $13 billion of the $90 billion seen on the balance sheet. What’s the huge remaining chunk, you ask? It’s linked to Ford’s financial division. Basically, when they dish out financing, they’re able to take on debt, lend it out at a higher interest rate, and make a substantial profit. How much profit, you ask? In 2012 the division reported a profit of $1.7 billion.
To put that in perspective, it almost entirely offset the huge loss Ford recorded in Europe last year. When you hear Ford’s debt is a problem, it’s actually under control, even though the balance sheet doesn’t inform you how. Now, to keep you informed, I need to tell you that Ford’s pension obligations are underfunded by roughly $18 billion. That’s a different story you can read about here. I have more bear cases to debunk right now.
Bear case: irrational sell off!
As a company, Ford has been performing very well, but the stock price was reluctant to move past $10 for months! Even when the company reports earnings above estimates, Ford’s stock still declines from Europe fears. Bears are tired of seeing Ford’s stock sell off heavily because of macroeconomic fears, even when the company itself is doing better than ever.
My response
Let me try a therapist take on this for you bears. I feel your frustration, and I understand that you have a right to be upset. I, too, struggle with this irrational behavior toward Ford’s stock.
However, don’t let it ruin your day. In fact, I’ve learned to absolutely love this irrational volatility! Why, you ask? Because while the bears complain about irrational selloffs, I profit. When the company is performing well, with improving quality, executing strategies, and growing profit all the while the stock price declines, buy!
