Ford Meetings

Begin forwarded message:

From: "Michaeli, Itay "
Date: May 25, 2011 6:59:05 EDT
To: undisclosed-recipients:;
Subject: F: Takeaways from Management Meetings; Reiterate Buy

Key Points:
 
What's New? — We recently visited Ford’s headquarters where we met with members of senior management. We walked away with increased comfort around key issues and reiterate our recently upgraded Buy rating ($18 target).
 
Key Takeaways — Management appeared constructive regarding industry pricing discipline, and noted that its own recent price increases were received well. Although management reminded us that 2011 price momentum could slow after a stellar Q1, an affirmation of the overall price-discipline strategy, May pricing checks and Ford's product cadence point to a continued favorable environment. On costs, management indicated that internal structural cost forecasting has proven itself reliable (limited cost creeps) and that the recent commodity pullback has been a welcome development.
 
Progress Towards Investment Grade— A restoration of investment grade ratings was a key thesis behind our recent upgrade of Ford shares. Though management understandably could not provide a timetable for an upgrade, we sensed that our late-2011/early-2012 timetable resonated as a reasonable base case. Management pointed to the benefits from removing collateral packages and widening the funding sources at Ford Motor Credit, which we think would improve long-term growth prospects. An historical analysis of crossover situations points to a favorable re-rating potential (see Figures 1 & 2) for the shares, particularly given Ford’s captive finance position.
 
Reiterate Buy, Potential Catalysts Ahead — Ford is hosting an investor day on June 7 in New York. We believe management may provide additional medium-term parameters around key metrics. While we don't view out-year consensus estimates as conservative, a reassuring margin outlook should be sufficient to revive sentiment in the shares at the currently low 4.0x 2011E EBITDAP multiple (~10% FCF yield) and amidst industry pricing strength.  The upcoming UAW negotiation will also be a focal point, with the focus on whether Ford is able to narrow the remaining modest cost gap with domestic competitors (even at an upfront cost).
 
Please click on the following link for access to the full report: https://www.citigroupgeo.com/pdf/SNA81019.pdf
 
_______________________________
Itay Michaeli
Autos & Auto Parts
Equity/Debt Research
Citi Investment Research
(212) 816-4557
itay.michaeli@citi.com 
 
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