Tuesday, November 3, 2009

Ford Motor Co. reported a third-quarter profit of nearly $1 billion Monday, a testament to the automaker’s shrewd financial and product moves in recent years, but analysts worry the company could become a victim of its own success.

The same day, the United Auto Workers union (UAW) announced that Ford workers rejected a new contract pushed by union leaders, at least in part because its members felt that Ford was so healthy they didn’t have to make further concessions.

Ford reported net income of $997 million, or 29 cents per share, in the quarter, compared with loss of $161 million, or 7 cents, a year ago. Analysts had expected a loss. The company also posted its first operating profit since early last year and said it expected to be “solidly profitable” in 2011.

Related story: GM posts monthly sales gain

A new union contract would have lowered Ford’s labor costs in line with General Motors Corp. and Chrysler Group LLC. It also included a no-strike provision. Workers are barred from striking Ford’s domestic rivals for several years as a condition of their bankruptcy restructurings.

“The UAW contract is up in 2011, and I think there could be a strike,” said John Wolkonowicz, an analyst with IHS Global Insight in Lexington, Mass.

“I think [Ford Chief Executive Alan] Mulally is not going to give in to them. There could be a strike just as the market heats up.

“Ford will be the focus. They work with one manufacturer to set a pattern for the industry, so they’ll choose the company they can strike because then they have some clout,” Mr. Wolkonowicz said.

Independent auto analyst Tom Libby agreed.

“Going forward, that’s very important because in the long run it puts them at a disadvantage versus the other two companies. That’s a very core cost, labor per unit. Per-unit costs have got to be in line with the competition if you are going to be sustainable long term.”

Mr. Wolkonowicz said Ford has to manage the expectations of investors and workers.

“It’s a tightrope that Ford has to walk,” he said. “On the one hand, you have to sound very confident about the future for the financial markets, to get your stock up and keep your borrowing costs down. On the other hand, if you make it sound too good the union will think you’re out of the woods and they don’t have to give anything back.

“But the fact is that you’re not out of the woods by a long shot and that [union vote] put Ford deeper in the woods,” Mr. Wolkonowicz said. “You could argue that union management should have painted an accurate picture for the rank and file, but apparently they didn’t do that.”

In fact, Ford said Monday that it would raise up to $3 billion with new stock and convertible notes due in 2016 to raise cash and boost its balance sheet.

Bernie McGinn, president of McGinn Investment Management Inc. in Alexandria, is more optimistic about Ford’s labor relations. His firm owns 320,000 shares of Ford and has $60 million under management.

“If you step back a few years, what the UAW has been giving back and giving back, it’s not surprising that at some point they would get some push back,” he said.

“Ford has some leverage, they can move some plants. But the UAW and Ford management were probably surprised they didn’t get the deal done, which means they didn’t do their homework.”

The Canadian Auto Workers approved contract changes similar to those rejected by the UAW, so Ford could have an incentive to move some production to Canada.

Ford said it was “disappointed that the additional changes were not ratified,” adding that it “will work with the UAW to discuss the next steps to ensure Ford remains competitive so we can continue to make product commitments and invest in our manufacturing facilities here in the United States.”

UAW President Ron Gettelfinger said his leadership was “respectful” of the rank-and-file decision and would not return to the bargaining table.

“[We] will continue to work with Ford on a daily basis in an effort to keep new products coming into our plants,” Mr. Gettelfinger said.

Ford had promised to create or preserve 6,000 union jobs in the United States if its 41,000 hourly workers became competitive enough.

Jobs were on the minds of Michigan residents Monday after hearing Ford’s financial results.

Teri Jourdan, a 29-year-old auto recovery technician from Grand Rapids, Mich., asked how much it would help the state’s economy.

“Unfortunately, this profitability doesn’t guarantee they’re going to reopen or build any more factories in Michigan. I do think it’s good that they were able to make a comeback without accepting government bailouts. That goes to show that we don’t have to have the government inadvertently line the pockets of the CEOs.”

Analysts credited Mr. Mulally, Ford’s chief executive officer, with the turnaround, but some see hurdles approaching.

“He’s a cut above. He’s done everything right. They have a great management team and a great car lineup,” Mr. McGinn said.

“As we go forward I think that Ford is really going to benefit from the fact that they didn’t take government money. We’re now approaching the time when the investing public is starting to appreciate Ford in and of itself, not as a turnaround play or a speculative play, but as a real live grown-up company,” he said.

“They have the best quality among the domestics, a great product lineup and they didn’t take a bailout, which to some people is very important,” Mr. Wolkonowicz said.

“They’ve also got a mountain of debt compared to anybody else in the industry that has to be paid down,” he said.

Ford’s foreign rivals are as formidable as ever, Mr. Libby said.

“If anybody’s going to say everything’s fine at Ford, they’re faking,” he said. “Relative to the domestics they’re in good shape but relative to Toyota and Honda and to the way Ford used to be, they have a ways to go.

“In the late ‘90s Ford’s market share was 25 percent and now, through the first nine months of the year, it’s 15.2 percent,” he said.

Still, they have dug themselves out of the same hole in the public’s mind, with GM and Chrysler, Mr. Libby said.

“The more they can continue to differentiate, that’s a major step forward,” he said. “There’s a lot of owners out there of Toyota, Honda and Nissan who don’t have domestics on their shopping lists. If Ford can keep moving away they will be seen as viable by those buyers.

Ford’s shares rose 58 cents, or 8.3 percent, to close at $7.58 Monday.

Andrea Billups contributed to this report.

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