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Thursday, August 24, 2006

A Blurry Picture for Ford (F) & Its Shareholders

By Yaser Anwar, CSC of Equity Investment Ideas

General Motors slashed labor costs quickly and effectively by offering cash incentives of up to $140K to union workers to get them to leave the company, Ford is now considering a similar move.

Ford is weighing offering buyout or retirement incentives to all of its U.S. hourly staff as it looks for ways to trim costs.

Ford had already stated that it would cut as many as 30K jobs and shut 14 factories in North America by 2012 as part of what it is calling its "Way Forward" plan - a desperate attempt to regain profitability.

Ford considered the buyout strategy after seeing that GM was able to sway about a third of those employees who were offered the deal. But a firm buyout plan has not yet been finalized.

A Ford spokeswoman told the Detroit News that discussions have been held, but a more detailed explanation - part of a broader restructuring plan - will not come until around mid-September.

Wall Street believes that Ford is moving too slowly to reach its target of eliminating 30K from its payroll by 2012 and that it needs to follow GM's example and offer a broad-based program of severance and retirement incentives.

I expect losses per share of $1.34 in 06 & $0.16 in 07. The difference between our operating EPS projections and my EPS estimates reflects pension adjustments.

Ford has many hurdles to overcome, such as: 1) Increased competitive challenges 2) A decline in expected demand & production 3) weaker than projected financial services income. Other than intense competition, Ford also faces 4) lower market share 5) excess capacity, 6) high gas prices, 7) rising legacy pension and health care costs. Hence, investors should consider earnings visibility to be limited.
Gasoline prices, which recently again exceeded $3 per gallon, are hurting demand for fuel-inefficient but profitable light trucks. The continuous price cuts & incentives will damage brand equity. Ford's shift from trucks to less profitable cars and other vehicles should compound negative impact on margins. Thus, investors should expect reduced income & revenues in 06 & 07.

On a positive note, restructuring & other cost reduction efforts should offset some of the margin pressure in 06. However, investors should still steer clear of Ford.

Sources: CNN & Money News

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