Thursday, July 24, 2008

Tough Day for US automotive as the elephants dance

Ford is in trouble.

Fact: Ford posted its largest quarterly loss of $8.7BN and in so doing burned through $8BN in first half of 2008 from its $34BN+ war chest of cash and lines of credit leaving it with $26BN of cash.

Fact: Ford is shuttering Truck production and retooling much of its US manufacturing capability to build small vehicles from its European line up. This will take about 2 years to take effect.

Unknown: Does Ford have enough cash to make it through the upcoming losses and its needs for retooling?

Unknown: When Ford finishes retooling out of trucks for small car production, will that be the right mix for the American market.

Conclusion: Ford's ability to react quickly to changing market conditions is significantly restricted due to debt obligations, union contracts, and the fixed assets that it has in the ground.

None of this is news to Ford or its investors, but it does leave you wondering whether the stock is still overvalued at $5.11 per share.

GM is set to announce its results in the coming weeks and it is not expected to bring good news either. Stay tuned the elephants are dancing.