Hi I'm Jimmy in this video
we're looking at the recent credit
rating downgrade that just
hit Ford's stock ticker symbol
F.
Now we're gonna look quickly at how
this downgrade could affect Ford
stock and ultimately Ford's
business.
And then we'll touch on how
what we think is the best move
now that this downgrade has
happened. What do we think is the
best move to do.
Do we jump into the stock or do we
wait. Okay so what happened here.
Well just so we're all on the same
page. There are three main credit
rating agencies there is Moody's
S&P and Fitch.
And this is the way each
of them rate companies.
So everything above the red line is
considered investment grade.
Everything below it not investment
grade. And that's a nice way of
saying junk status.
That's what they used to call it.
But you might also hear it called
high yield bonds.
Everything below it would be
considered a high yield bond.
So on this scale Fitch currently
has Ford sitting at a triple
B rating that's a medium grade
rating but it's just above
the non investment grade rating
which every company is trying to
avoid if they can.
Now Fitch also has Ford
as with a negative outlook.
And when we switch over to S&P but
S&P gets the same thing triple
B rating and a negative outlook.
Now the negative outlook is
important because generally the
outlook will fall to one of three
categories positive negative
or stable.
And in theory once a company has
a negative outlook Well it's much
easier to drop into the next
rating into the next rating lower
or 4 was positive it would be easier
for them to jump operating in these
ratings are important because
ultimately these ratings play a huge
role in the interest rate
that the company will pay on their
debt. The lower the corporate credit
rating the higher the interest
payment will ultimately be which
will also lower profits lower
earnings per share every day
it affects everything right down the
line. Now it's also important to
point out that if a company
already has debt that is out their
debt outstanding a new
rating generally doesn't affect
existing debt.
Sure it might affect the price of
the bond as people buy it or sell
it. But the rating change doesn't
make the interest payments on
existing debt any higher
at least for most traditional types
of debt.
OK. And this brings us to the big
news for Ford.
So Moody's had Ford's rating
right here at B double A
three and they had a negative
outlook.
Well a couple of days ago Moody's
downgraded Ford to be a
one and they upped their outlook
to stable which is a good thing.
But this is big because
this pushes Ford Moody's
credit rating the low the investment
grade the red line here.
So the fear now is that S&P
and Fitch will jump on board
and downgrade Ford's
credit rating as well.
So why did Moody's downgrade Ford
and what does it mean for Ford
stock. Well it seems that Moody's
view on the
macro picture for demand
seems to have turned a bit more
negative especially in developed
countries.
Then in the Chinese market.
Well between the trade tensions
and increased competition.
Well it seems that Moody's believes
that things are going to be a bit
tougher for Ford going forward.
So clearly there are some big
picture issues in the long run
from a macro perspective.
But this is a number of auto
sales on an annualized basis
going back to 1989.
And as we could see the past couple
of years for auto sales has been
pretty good.
And this isn't just Ford.
This is all new you
all new cars sold
in the U.S.
So one fear is that if Ford
is getting downgraded if they're
reducing their credit quality at
this point when the market seems
to be doing fairly good well
what's going to happen when the
country eventually hits a recession
similar to the Great Recession back
here when sales really slump.
Now Moody's also brought up a few
other interesting points.
They commented on the margins of
Ford and
as we can see this is Ford's gross
profit margins going back the past
couple of years.
Yes it seems that profit margins
have been trending a bit lower.
And if we think that this is going
to continue to fall that could end
up being a real problem then when we
switch over to Ford's debt.
Well here once again this is
going in the wrong direction.
So one quick point here
is that I pulled margins I pulled
the annual numbers so we can get a
look at the big picture.
And I actually did the same annual
numbers for the balance sheet
so it can get an idea of the debt
that they have.
But with the balance sheet items
it often makes sense to check the
most recent quarter since balance
sheet represents since any balance
sheet represents a single point in
time. So in theory we want the most
recent point in time.
So when we pull down Q2 numbers
well that things actually got a
bit worse.
OK. Now things aren't all bad.
Ford also has some cash.
Once again we're doing the same
thing. These are annual numbers now
we switch over to the most recent
quarterly update and as you could
see Ford actually picked up
some cash in the past couple of
quarters.
So I think this is worth keeping in
mind that they get about thirty nine
billion dollars in cash right.
Now we get down to the meat of the
whole thing. So what's going to
happen next.
Well right now Ford is trading
for suddenly more than nine dollars
a share. And after this news
broke while Ford's stock fell by
about 5 percent.
But I actually don't think that this
downgrade is going to hurt Ford
all that bad in the near future
from a fundamental business
perspective not necessarily a stock
perspective.
Now I'm actually carefully saying in
the near future because a lot
of it depends on a few different
things going forward.
Ford has been they've been working
on a restructuring and although it's
making progress it still needs
to go some distance before
it can help protect them in the
economic downturn.
In theory this should improve their
profit margins.
So the question for us is how
much is this downgrade going to
affect short term costs.
And this is what I could find when
it comes to when Ford's debt
matures.
So some debt retires in 2019
some of it's going to mature in 2020
and then even more in 2021.
Now this is important because
oftentimes companies will replace
debt that is maturing if they need
to retire that debt.
They will issue new debt.
And in this case they're likely to
issue would at a higher interest
rate and therefore a higher interest
expense. So between these three
years while Ford owes about let's
say 35 or thirty six billion.
But if we were to switch back to
cash well we can see that they're
sitting on about 38 39
billion dollars in cash and short
term investments.
So in theory they can handle
at least the next few years of debt
if they need to.
And I also think it's important to
point out that Ford's Fitch rating
and S&P ratings well they haven't
been downgraded at least not yet.
So this could eventually be a good
thing for Ford if they had to issue
more debt.
So if they're able to improve
margins when they complete their
redesign plans what is this
ultimately mean for Ford's stock.
Well I'm not sure personally that
I would be jumping in here to buy
Ford stock.
They do have a decent dividend yield
of right around the 6 percent level
but their dividend is going to
take away some of the cash and
that could ultimately be a problem
if they're especially if the other
two rating agencies start to
downgrade things.
So yes they're paying good dividend
but that takes their cash.
They need that cash for the debt.
So it's sort of a double edged
sword. But if we already own Ford
stock well if I already
owned it I think that this
would not cause me to go out and
sell the stock.
I think that I look at this as a red
flag. I don't think it's we have to
pull the emergency chute.
I think it's this is a warning shot
fired thankfully by
Moody's.
So it gives us a chance to
examine what's going on.
Look at the redesign plans do we
think that Ford is going to be able
to complete that before the economy
takes a big turn and Ford ends
up in trouble. Now I understand the
rating downgrade by Moody's.
This is sort of the perfect storm of
news with tariff struggles
in China.
They're currently restructuring
things. There's question marks as to
the economy.
So I understand the macro question
marks but for me I think it makes
sense no matter our position if we
already own the stock we're thinking
about buying it.
I think it makes sense to sit steady
here and try hard not to overreact
to this type of news.
I think that at the end of the day
it could make a lot of sense to
jump in and buy it if we believe
in their restructuring plan.
But what do you think.
Do you think that Ford's a good buy
here is it's a buying opportunity.
Is this a good reason to jump ship.
Are you sitting and waiting and just
holding.
Please let me know what you think of
the comments below.
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Thank you so much for stick with me
all the way into the video and I'll
see in the next video.
Thanks.