10 Sep

Ford: Moody’s Cut It to Junk, More Downside Ahead?

WRITTEN BY Anuradha Garg

On Monday, Moody’s Investor Service downgraded Ford (F) stock by one notch to “Ba1” from “Baa3.” A “Ba1” rating corresponds to the highest rating in the junk bond category.

Moody’s downgraded Ford’s credit rating

The downgrade surprised the markets. Usually, the credit rating agency puts a company’s bonds on a watch for a downgrade before actually downgrading them. However, Ford’s bonds weren’t put on a watch. The stock fell by more than 3% in extended trade on Monday after Moody’s downgrade.

S&P and Fitch ratings for Ford

In July, S&P Global Ratings revised its outlook on Ford to negative from stable and affirmed its “BBB” rating. In May, Fitch revised its outlook for Ford from stable to negative and affirmed its “BBB” rating. S&P Global Ratings and Fitch’s credit ratings on Ford are still two notches above junk.

Moody’s rationale for Ford downgrade

Moody’s rationale for downgrading Ford “reflect the considerable operating and market challenges facing Ford, and the weak earnings and cash generation likely as the company pursues a lengthy and costly restructuring plan.” Moody’s is also concerned that Ford’s performance deteriorated at a time when global auto conditions were relatively good. Currently, the global auto sector is going through a downturn phase. China’s auto sales fell for the 13th consecutive month through July. Moody’s noted that Ford’s earnings from China fell from over $1 billion in 2016 to a loss.

Since auto conditions have weakened considerably, Moody’s is concerned that “Ford now faces the challenge of addressing these operational problems as demand in major markets is softening.”

On August 20, Moody’s upgraded its outlook for Tesla (TSLA) from “negative” to “stable.” The upgrade was mainly done to reflect Tesla’s achievement of Model 3 scale production. To learn more, read Moody’s Upgrades Tesla Over Model 3: Here’s the Upside.

Ford’s restructuring plan

Investors should note that last year, Ford announced its $11 billion global restructuring program. The program is expected to last for three to five years. Through the restructuring, the company wants to reallocate its capital to high-return segments and leverage its partnerships globally.

The company is also restructuring its North American product portfolio. Ford wants to replace almost 75% of its product mix in the region. The company has already shifted its focus to trucks and SUVs from traditional sedans to maintain its margins. Due to Ford’s restructuring initiatives and the expected savings, Morgan Stanley (MS) turned more positive on the stock in August. To learn more, read Morgan Stanley Sees Ford’s Dip as a ‘Buying Opportunity.’

The demand for trucks and SUVs is picking up in the US despite overall weaker auto demand. Other automakers including Honda Motor Company, General Motors (GM), Fiat Chrysler Automobiles (FCAU), and Toyota (TM) are also trying to expand their SUV and truck line-ups. Tesla is also expected to unveil its electric pickup truck soon.

Focus on electrification and Moody’s concerns

Ford is also focusing on performance vehicles, including hybrid and electric vehicles, going forward. The company is investing $11.5 billion in its vehicle electrification efforts. Moody’s thinks that Ford’s current portfolio could make it vulnerable to large emission penalties in 2020 and 2021. Moody’s thinks that while Ford’s focus on EVs and hybrids could help it comply with emission regulations, “customer acceptance of these vehicles and Ford’s ability to earn an economic return on them remains uncertain.”

Grounds for another rating downgrade 

Moody’s also noted why Ford’s rating could be downgraded more. The grounds include:

  • Ford’s major initiatives don’t pan out as expected
  • China’s operations aren’t able to maintain a breakeven performance by 2021
  • Ford’s cash position falls below $20 billion—compared to $23.2 billion currently
  • Ford’s free cash flow burn exceeds $1 billion

Moody’s also mentioned that Ford’s rating probably won’t get an upgrade in the near term. However, strong execution of Ford’s initiatives could lead to an upgrade.

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