For cyclical industries such as auto manufacturing, economic shocks can be extremely painful, or even fatal. That proved to be the case for General Motors Co. (GM) during the 2008 financial crisis. The automaker was forced to take a government lifeline and its equity was virtually wiped out in the restructuring.
Not all automakers need share such an ignominious fate, however, as Ford Motor Co. (F) showed. The venerable automaker survived the Great Recession and went on to grow and thrive during the long bull market that followed. Today, the company faces another demand shock in the form of the Covid-19 shutdown. It appears well placed to weather this new economic storm, and to make it out the other side intact.
Powering down production
Automakers around the globe have been struggling to grapple with the surging novel coronavirus epidemic. The crisis has precipitated a near-total lockdown of much of the world’s population, and has resulted in a catastrophic drop in both business production and consumer demand.
As the crisis continued to escalate this month, most automakers found no alternative than to close their factories. Ford joined the other Big Three automakers, GM and Fiat Chrysler Automobiles NV (FCAU), in shutting down production at their factories.
The worldwide production shutdown has idled an enormous amount of plant and equipment, but it was likely the most prudent decision Ford CEO Jim Hackett and his confrères could make in light of the pandemic.
Bolstering the balance sheet
On March 19, Ford announced a number of measures that would strengthen its cash position and liquidity in response to the Covid-19 disruption. The company drew down the entirety of its $13.4 billion corporate credit facility and drew an additional $2 billion from a supplemental credit line. It has also suspended its dividend for the duration of the crisis, which, if maintained through year-end, will save about $2.4 billion.
Ford’s actions have effectively added $17.8 billion of additional liquidity to the $35.7 billion in cash on hand that it had at the end of 2019. In a statement accompanying the company’s March announcement, Hackett declared that these actions, combined with a strong pre-crisis balance sheet, would provide Ford with sufficient cushion to come out relatively unscathed:
"While we obviously didn't foresee the coronavirus pandemic, we have maintained a strong balance sheet and ample liquidity so that we could weather economic uncertainty and continue to invest in our future.”
Covid crisis credit downgrade
Despite Ford’s efforts to bolster its cash balance and financial firepower, some observers still see trouble for the automaker. On March 23, S&P joined Moody’s in downgrading Ford’s debt, relegating the company’s bonds to junk status. This has given the automaker the dubious honor of being the largest such “fallen angel” among corporate borrowers. According to S&P, the damage to Ford from the production shutdown could be worse than that of a typical recession:
“The stress of having all of a company’s plants shut down differs from that of a conventional recessionary downturn. The rate of cash burn, even for a few months, could be faster than that which transpires during a typical recession.”
Ford’s cash position may be somewhat misleading without a look beneath the surface. With about $27 billion in debt maturities coming due by the end of 2021, much of the company’s cash is already spoken for. Moody’s estimates that Covid-19 could cost it $8 billion over the next 12 months.
Verdict
Ford is likely to see more volatility as the coronavirus crisis continues, and may find the cost of extended production shutdowns onerous in the coming months. Given its proactive measures to bolster its balance sheet through credit line drawdowns and dividend suspension, however, I see no reason to fear for the company’s future. Ford has weathered worse with fewer resources.
Things may well get tight, thanks in large part to its considerable debt repayment obligations over the next 24 months, but Ford has the resources to get back to business when the crisis subsides.
Investors should pay close attention to Ford over the next several months. It should present a highly attractive buying opportunity once the uncertainty has cleared up a bit more.
Disclosure: No positions.
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