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First, some background. It's no secret that Ford's share price has been sinking lately, faster than the fuel gauge drop we see while cruising in that monstrous Excursion. This chartshows that the Ford stock price has dropped about 17% during the last two years, compared with about a 31% rise in the S&P 500. Including dividends in the returns would make Ford look a little better, since it's currently paying about a 4.7% yield, over 3.5% more than the S&P 500 average. That's a small consolation for recent shareholders, who have seen Ford lose about 17% in 2000, including dividends.
The Ford board of directors is scratching its head over this stock price drop. According to Market Guide, the company's doing pretty well. Sales have increased about 15% from last year and earnings per share have increased about 16%. More people are buying Fords now than ever. Yet the stock price remains stuck in reverse, the trailing P/E ratio is a measly 7, and the price-to-sales ratio is a minuscule 0.3 -- compared to 7.6 for the S&P 500 stocks as a whole, and about 30 for market darling Cisco Systems.
Traditionally cyclical stocks trade at low P/Es when their business peaks. This seeming contradiction is a result of investor anticipation of the "inevitable" slowdown in business that cyclical industries usually experience. All of the automakers are in the same boat here, and have been for years, waiting for an economic downturn that just hasn't happened yet.
The Ford board figures they've got to do something to appease impatient stockholders who've been watching Ford's stock price skid faster than Jeremy Mayfield's Taurus (which won NASCAR's Pocono 500 Monday). So, they announced a plan two months ago. A little summer stock plan, which they hope will enhance shareholder value.
It's a two-pronged strategy, involving both a spin-off and a cash distribution. First, let's look at the spin-off, slated to be completed next week. Like General Motors did with Delphi <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DPH)") else Response.Write("(NYSE: DPH)") end if %>, which was spun off early in 1999, Ford thinks it can create shareholder value by spinning off its auto parts subsidiary Visteon Corporation, the world's third-largest producer of auto parts. Visteon will soon be traded on the New York Stock Exchange under the symbol VC, and is currently trading on a "when issued" basis.
Last week, Ford set the distribution ratio for the deal. For every share of Ford owned, stockholders will receive 0.130922 shares of Visteon. So an owner of 100 Ford shares will be given 13 shares of Visteon on June 28, the distribution date. (A cash equivalent of the other odd 0.0922 shares will be distributed, known as a cash in lieu payout.) Since Visteon was trading at $13.50 a share yesterday, that means such a shareholder has gained an extra $1,755, right?
Unfortunately, wrong. After the distribution of Visteon is made, the stock price of Ford will drop accordingly to account for the distribution. Already one can buy Ford shares that either will or won't include the right to acquire the Visteon spin-off. The shares without the Visteon spin-off are trading for about two dollars less per share than those that include Visteon. Our search for the proverbial free lunch continues.
Will the Visteon spin-off be a good deal for Ford shareholders? The value in this deal depends on two factors: the performance of Visteon, and the performance of Ford without Visteon.
In an announcement that has already dragged the stock price down, Visteon announced its profits for next year will be lower than this year. The reason is mainly that the mother company has cut a deal with its daughter that slashes the prices Ford will pay Visteon for its products, in order to retain Ford's business. Since Ford will have no stake whatsoever in Visteon, the parent is now free to shop anywhere. Since Ford's orders were 88% of Visteon's business last year, it doesn't take an MBA to figure out that Visteon profits aren't heading skyward next year.
But in the long-term (the term we Fools like), Visteon's release from Ford has a bright side. Now Visteon is free to sell to Ford competitors. Already in 1999, 40% of Visteon's new business was from companies other than Ford, a number that's sure to grow in the following years.
Delphi, GM's spin-off, is estimated to grow earnings about 10% this year and 9% the year after. OK, it's no Dell Computer, but this is the car business we're talking about -- they're selling real drives, not hard ones. Nonetheless, Delphi's stock price,following the fortunes of the auto manufacturers, has taken a road trip south since the spin-off in February 1999, down about 17% versus a gain of 20% for the S&P 500.
What about Ford's fortunes without its daughter Visteon? We've already seen that Ford, now free to choose any supplier of auto parts, has already negotiated cheaper prices from Visteon, and you can bet it will be shopping around for even better prices elsewhere. That sounds like it can only improve profit margins. And the parent has shed a low-margin business faced with high costs in order to concentrate more on what it does best -- manufacture and sell cars.
Since the Visteon spin-off will drop Ford's share price by about 5%, and the company will likely retain the current dividend of two dollars a share, that will also mean a dividend increase of about 5% for the current owners of Ford stock. Sounds good.
But Ford's going to be tinkering quite a bit with that dividend later this summer. The second act of its summer stock value enhancement show is going to make the Visteon spin-off look like small potatoes. Tune in next Wednesday when we'll see what plans the Motor City giant has for 10 billion dollars in loose change it happens to have lying around. Hint: If you're a shareholder, bring your wallet!
Beating the S&P
year-to-date returns
(as of 06-20-00):
Bank One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %> -6.7%
PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> +17.4%
Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> -17.4%
Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> -1.4%
Fannie Mae <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNM)") else Response.Write("(NYSE: FNM)") end if %> -11.0%
Beating the S&P -3.8%
Standard & Poor's 500 Index +0.5%
Compound Annual Growth Rate from 1-2-87:
Beating the S&P +23.0%
S&P 500 +17.4%
$10,000 invested on 1-2-87 now equals:
Beating the S&P $161,500
S&P 500 $85,900