Ford's Latest Financing Incentive: Paying Debt

Good timing. Ford Motor Co. was scheduled Wednesday to make a debt payment of $860 million in cash or stock. Ford chose to pay cash, but it also prepaid one outstanding bond entirely. All in all, Ford is paying $4 billion in cash to cut its debt load, The Wall Street Journal reported.

Even if the absolute impact on Ford's net debt is minimal—it gets a 2 percent discount for early payment—the underlying message is encouraging. U.S. light-vehicle sales remain sluggish. Investors nervous about the strength of the recovery had knocked Ford's shares down to less than $10 before this announcement, from almost $14.50 in April.

Ford's actions imply the underlying business is performing well, perhaps reflecting increasing market-share gains. Looking to July, when Ford reports second-quarter earnings, investors should be aware of the potential for a positive surprise.

Putting a 4.5 times multiple on estimated 2011 earnings before interest, taxes, depreciation and amortization for the automotive business, and adding in the finance business at a book value of $11 billion, results in an enterprise value for Ford of about $60 billion. Take off pro forma net debt and unfunded retiree obligations of about $20 billion and the implied value per share is about $11.

That isn't far above the current price of $10 and change. But Ford's fortunes reflect both the vehicle market and its bloated balance sheet. Every effort to reduce the impact of the latter helps make it more of a normal stock, with potentially a higher multiple. Ford is forecast to generate perhaps $10 billion or more of free cash flow after capital expenditure over 2010 and 2011, which should cut into its remaining debt burden significantly. If vehicle sales accelerate in 2011, so should the stock.