Ford's Recession Speedway
Options Plays by Better Trades
April 15, 2009 -
While General Motors (GM) and Chrysler are on the verge of going into
bankruptcy, Ford Motors (F) is quietly
making strides restructuring its core businesses to emerge from a global
recession that has crippled the auto industry. Even though auto makers are
in dire straits, Washington has thus far sent a clear signal it views a
vibrant U.S. auto manufacturing base as a critical cog in the economic
recovery process.
Assuming Uncle Sam remains committed to Detroit over the short term and an
economic recovery is in the works, Ford's long-term prospects make it an
outstanding candidate for a LEAPS play.
Significant speed bumps do lie in Ford's road. Ford lost $14.6 billion in 2008
amid a 20% drop in vehicle sales and the automaker is churning through its
cash stockpiles which are expected to run out in about a year. During the
fourth quarter of 2008, Ford lost $2.7 billion, or $1.30/share, as dwindling
sales of vehicles and plant closures continue to weigh on the Dearborn,
Michigan-based car manufacturer. Year-over-year, sales dropped 41% in March,
prodded lower by a 73% decline in SUVs.
Ford recently slashed its debt by $9.9 billion, yet S&P noted on April 13th
that significant risks remain to debt holders, leaving open the possibility
of a downgrade over the next couple years by assigning the automaker with a
negative outlook.
Despite the auto industry's problems, Ford is showing signs of life. The auto
maker has moved to dramatically drive down production and expenses to align
itself with a new equilibrium of demand in addition to lowering its debt
ceiling. S&P raised Ford's credit rating to CCC-plus from selective default
to reflect Ford's credit position compared with U.S. competitors.
Hoping to bolster its cash position, Ford is actively shopping its
Sweden-based Volvo unit as it looks to exit the market for European cars.
Back in 1999, Ford bought Volvo for $6.5 billion under its Premier Automotive
Group division. Currently, Volvo is estimated at about a third of that value.
Long Term Equity Anticipation Securities, or LEAPS as they are commonly
referred to, are options with significantly longer terms to expiration than
common contracts. Ford's January 2011 $2.50 call options had a bid-ask spread
of $2.45-$2.60 intraday on April 14th, meaning the investor would need Ford's
stock to rise just over $5/share to become profitable. Ford shares traded at
$4.25 near the April 14 close.
Ford CEO Alan Mulally's critical decision to recapitalize Ford with $23.6
billion in loans back in 2006 could one day be looked upon as a flashpoint in
the company's 106-year history. Wall Street is rewarding Ford by not beating
down its shares to the same tune as General Motors. If Ford can survive the
auto downturn and successfully restructure, traders can lock in long-term
leveraged returns via LEAPS.
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