April 8 (Bloomberg) -- Ford Motor Co. cut its 2005 earnings forecast and said it won't reach a 2006 profit target because of rising gasoline prices and health-care costs. Standard & Poor's said it may drop Ford's credit rating to junk.
Ford, the second-largest U.S. automaker, today reduced the 2005 forecast by as much as 29 percent and said in a statement that it will fall short of its 2006 target of $7 billion in pretax profits. Standard & Poor's responded 20 minutes later by cutting the outlook on Ford debt, rated at the BBB-, the lowest investment grade, to ``negative'' from ``stable.''
Ford and larger U.S. rival General Motors Corp. face downgrades to junk, or non-investment grade, because of falling profits caused by rising costs and market-share losses to Asian rivals such as Toyota Motor Corp. Ford's U.S. market share is at quarter-century lows, and GM is at its lowest share in 80 years. Falling credit ratings mean increased borrowing costs.
``The larger impact on the stock is that they are walking from their 2006 goal,'' said Joe Amaturo, an analyst with Calyon Securities (USA) Inc. in New York. Ford's announcement ``suggests they are not immune to the microeconomic factors such as health care and oil, and it doesn't help that their SUV sales have been off markedly year-over-year for the first quarter.''
Ford, the No. 2 U.S. automaker, reduced its forecast to $1.25 to $1.50 a share, excluding some costs, from a previous estimate of $1.75 to $1.95 a share. It didn't create a new earnings target for 2006.
Chief Executive William Clay Ford Jr., 47, established the $7 billion pretax profit target for 2006 following a $5.45 billion net loss in 2001. Chief Financial Officer Don Leclair, in an interview last year, said the company wouldn't normally reveal such a long-term target. It did so because it needed time to demonstrate progress to investors, Leclair said then.
An Echo of GM
The Ford forecast follows GM Chief Executive Rick Wagoner's March 16 slashing of his company's 2005 forecast to a range of $1 to $2 a share, excluding some items, from $4 to $5 a share because of rising health-care costs and slowing sales. GM doesn't provide a net income forecast or give its forecasts in a dollar value.
On Jan. 13, when GM set its original $4 to $5 per share forecast, the Detroit-based automaker also delayed its own $10 a share profit goal from ``mid decade'' to ``as early as 2007'' because of the deteriorating business environment. GM set that goal in February 2002.
Moody's Investors Service this week cut GM's debt ratings to Baa3, the lowest investment grade, putting it in line with S&P and Fitch Ratings, which both rate the automaker BBB-, their last step above junk. All three rating companies have a negative outlook on GM debt, which means they might downgrade it again.
`Bad News'
``There's been a lot of bad news out of the autos,'' said Thomas Parker, who manages $2.6 billion in high-yield debt for Barclays Global Investors in San Francisco. ``Ford has lagged GM since Moody's cut and it's catching up; there's a feeling Ford is heading down the same road.''
S&P said Ford's reduced 2005 forecast and expected failure to meet the 2006 target may result in a downgrade. ``We now view the rating as weak,'' Standard & Poor's credit analyst Scott Sprinzen said in a statement. The current BBB- rating ``can tolerate several quarters of weak profitability and cash flow, but only under the assumption that financial performance will improve to more satisfactory levels thereafter.''
Ford's debt rating ``could be lowered at any point if we came to doubt that Ford was on a trajectory to realizing such improvement,'' Sprinzen said.
Moody's said April 5 it was reviewing Ford's debt for a possible downgrade. Moody's rates Ford as Baa1, or three levels above non-investment grade.
Bonds
The extra yield, or spread, investors demand to own Ford's 7.45 percent notes maturing in 2031 rather than Treasuries widened about 35 basis points to 430 basis points, according to Trace, the bond-price reporting system of the NASD. A basis point is 0.01 percentage point.
Ford, of Dearborn, Michigan, has $13.72 billion in outstanding bonds and loans due this year, according to Bloomberg data.
In after-hours trading, Ford shares fell 53 cents, or 4.8 percent, to $10.50 at 6 p.m. on the Inet ATS trading system. Ford made its announcement at 4:05 p.m. The shares fell 27 cents to $11.03 at 4:15 p.m. in New York Stock Exchange composite trading. They've fallen 17 percent in the past year through yesterday.
The company said its first-quarter earnings exceeded its forecast of 25 cents to 35 cents a share, excluding some costs. Ford cited rising steel and oil prices, health-care expenses and ``continued aggressive pricing actions by competitors'' in cutting the 2005 forecast and abandoning the 2006 target. Ford will announce first-quarter earnings on April 20.
Health Care, Steel, Gasoline
Ford spent $3.1 billion on health care in 2004 for 550,000 U.S. employees, retirees and their dependents.
The price of a ton of hot-rolled sheet steel, the industry benchmark, has risen 48 percent since February 2004 to $622, according to pricing service Purchasingdata.com.
Unleaded gasoline prices in the U.S. rose 21 percent in the first quarter to an average of $2.15 a gallon, according to Bloomberg data. The increase has hurt sales of Ford's mid-sized and large sport-utility vehicles. U.S. sales of the Explorer, the nation's top-selling SUV, fell 25 percent during the first quarter. Sales of the Expedition, a larger SUV, fell 27 percent.
Profit Source
``That's where their profits come from,'' said Dennis Virag, president of Automotive Consulting Group Inc. in Ann Arbor, Michigan. ``When you don't have robust sales, the bottom-line suffers.''
Ford said today the company's automotive pretax profits, excluding some costs, will ``break even at best'' in 2005. On that basis, Ford's auto operations had pretax profit of $850 million in 2004.
The automaker said it estimates costs of what it considers one-time items to be 8 cents to 10 cents this year. Such costs include an ``improvement plan'' at its Premier Automotive Group and investments in fuel-cell technology. The company's money- losing Jaguar unit is closing a U.K. plant this year to cut costs.
Ford cut production in North America, its largest market, by 9.9 percent in the first quarter and plans a 1.2 percent reduction in the current quarter.
