If you thought that the great auto recovery had turned into peak auto, you might be right. Moody’s has issued a negative rating outlook on the ‘Baa2’ rating for Ford Motor Company (NYSE: F). This might go unnoticed by most investors, but if Ford’s long-term credit ratings were to drop more than just one small notch and go under Baa3 then Ford’s debt would then be considered “junk bonds.”
Ford has had its share of disappointments. Its head of China left the job after just a few months of being there, and Ford had a bit of a disappointment on earnings when so many other companies are reporting great earnings. And Ford even experienced a slight drop in 2017 U.S. sales.
As far as why Moody’s is souring on Ford now, there are numerous issues that were brought up. Moody’s cited a more challenging operating environment acting against Ford, noting rising incentives, softening demand in North America, higher commodity costs, and increased spending to expand its portfolio of electric vehicles. All of this adds up to pressure against what would otherwise be a solid financial position.
One issue which was also addressed was the challenges Ford is going to face in implementing its “Fitness Redesign” initiatives. And the company also allowed erosion in many of the operating disciplines over the last 18 months which had bolstered the company following the 2009 restructuring of the North American auto sector. Another issue to worry about is the industry move toward vehicle electrification, autonomous driving, and ride sharing.
Perhaps the real issue here is that no fix looks to be coming soon. Moody’s said that it now expects Ford’s operating performance to remain under pressure into 2019. Several factors could contribute to the longer-term success of the programs in 2018 and could also support a stabilization of the outlook:
1) the successful launch of vehicles in Ford’s robust 2018 new product pipeline;
2) a strengthening in operating margins during the second half of 2018 on the back of the new product rollout;
3) a material improvement in working capital and other asset management initiatives that will improve cash generation;
4) further improvement in product mix and net pricing globally.
While Ford’s progress in the areas hat could stabilize the company would be constructive in restoring metrics that could support the ‘Baa2’ rating by 2019, it sounds more like the winds are against Ford rather than behind its back.
Ford also shares a risk that the entire auto industry faces in the need to allocate capital judiciously across an expanding range of potential investment opportunities. These were listed as geographic markets, vehicle categories, drive-train technologies, joint ventures/partnerships, and the various business models related to ride-sharing. The risk is that this capital reallocation process could come with sizable restructuring expenditures if Ford decides to exit major businesses, product categories, or markets. Moody’s said of this risk:
If such restructurings occur, they could place additional pressure on Ford’s already weak near-term financial performance and on its liquidity position. This added stress would have to be balanced against the timing, magnitude and certainty of the anticipated restructuring benefits.
Moody’s also noted that prospects for an upgrade of Ford’s ratings through 2020 are very modest. That being said, Ford was said to currently have a “sound liquidity position supporting its automotive operations” with 2017 gross liquidity totaling $37.4 billion at the end of 2017 — made up of $26.5 billion in cash and marketable securities and $10.9 billion in committed credit facilities. Ford’s automotive debt maturing during the next twelve months also approximates only $3 billion.
Investors might ignore what the credit ratings agencies have to say about a company barely above the investment grade versus junk rating line at this time. After all, the market has been on fire and consumers seem to be more than optimistic. What seems like a large risk that Moody’s had addressed is if there is a sudden interruption in the great U.S. and global economic recovery, or if all that new lower-tax spending fails to materialize into car sales. That would only act to exacerbate what is already seen as unwanted pressure.
If it seems like a stretch to think that Ford could face junk bond ratings, look elsewhere at other ratings agencies. Fitch’s long-term issuer default rating is already at ‘BBB-‘ for senior unsecured debt. S&P is a tad better with its long-term issuer rating at ‘BBB’ and a ‘Stable’ outlook.
Ford shares were last seen down just 0.4% at $11.08, which may not be too bad on a day where the Dow was also down 1.4% and the S&P 500 was down 1.1%. Ford’s 52-week range is $10.47 to $13.48 and its consensus analyst target price is $12.47. Ford’s dividend yield is now over 5%.
H&M is not among the best-known retailers in the United States, although it has fashion stores in America. The Swedish company is one of the largest store chains in the world. As it announced its earnings for last year, management said it would close 170 stores, making it the most recent retailer to yield to the advance of e-commerce.
H&M Group owns a number of brands: H&M and H&M Home, COS, & Other Stories, Monki, Weekday and ARKET. Among them, the company has over 4,700 locations in 69 countries. In 2018, it will have net store growth. Management announced:
In 2018 the H&M group plans to open approximately 390 new stores and approximately 170 store closures are planned, resulting in a net addition of approximately 220 stores. New planned H&M store markets are Uruguay and Ukraine.
Additionally, it plans to open e-commerce operations in India, and it has just launched online businesses via franchises in Saudi Arabia, the United Arab Emirates and Kuwait.
CEO Karl-Johan Persson framed the company’s challenge, which is faced by virtually every other large retailer in the world:
Our performance during 2017 was mixed, with progress in some areas but also difficulties in others. We delivered growth of 3 percent in 2017 which is clearly below our expectations. In the fourth quarter our sales overall decreased by 2 percent in local currencies. Our online sales and our newer brands performed well but the weakness was in H&M’s physical stores where the changes in customer behaviour are being felt most strongly and footfall has reduced with more sales online.
It is more than a broad hint that the future of H&M Group is not in stores but via e-commerce. And, as it expands online, it has found itself and will continue to be tremendously challenged by Amazon.com and Amazon-like operations around the world. It is only a matter of time that H&M will continue to retreat from some markets. And, eventually in most of its markets, physical stores will be harder and harder to maintain.
Like most of the few other huge global retailers, particularly Walmart, H&M has the sale heft to expand opportunistically in markets in which it believes stores can still prosper. Like Walmart, it has the balance sheet and brands to make a larger push online than almost any other retailer. However, it will need to drop its store count as it suffers from the inexorable advance of consumers who prefer to shop from their personal computers and smartphones.
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JANUARY NEWSLETTER 7
A subsidiary of Katz's company The Katz Group has taken ownership of the nearly three-year-old right-leaning site, LifeZette's interim CEO, Tom Edwards, confirmed to CNN.
Katz is one of Canada's richest people, according to the magazine Canadian Business. He runs one of Canada's largest privately owned enterprises, which owns everything from pharmacies to the NHL's Edmonton Oilers.
A spokesperson for Katz declined to comment, saying, "The Katz Group is a private company and declines to comment on its investment activities."
The copyright logo at the bottom of the LifeZette homepage changed on January 3rd from Ingraham Media, Inc to LifeZette - KG Airco Inc. KG Airco Inc. appears in public records using the same address as The Katz Group in Canada.
Ingraham has maintained a minority stake in the company and is "still very much involved in the business," Edwards said.
Edwards' company, TJ Edwards Group, says on its website it is a firm that provides "interim Chief Financial Officer" services and "support for mergers, acquisitions and venture capital financings."
Though Edwards declined to comment as to why the site changed owners, a source with knowledge of the situation said staff were informed last fall that the site was in a difficult financial situation and was facing a possible sale or even closure. Staff were told of their new owners in December, the source said.
Ingraham launched LifeZette in 2015. At the time it billed itself as a "a cultural and political web destination for conservatives and independents." But the site has failed to make waves and its traffic numbers are not competitive and have experienced a sharp decline over the past year, according to data from ComScore, which tracks website audience numbers.
In December, shortly after several inquiries from CNN regarding the site's financial health, LifeZette managing editor Maureen Mackey posted a message to readers titled "LifeZette 2.0" which noted that the company was in the midst of an operations review.
"[I]n key management positions, we are in the process of making important changes — and are in active discussions with some of the most dynamic corporate executives in America," the message said. "This new team will ensure that LifeZette remains a potent and growing force in the digital media space for years to come."
Ingraham stepped away from the day-to-day operation of the site last fall, when Fox News named her as the new host of a 10 p.m. show. She did not respond to multiple requests for comment. Mackey, and an email address for media requests at LifeZette also did not respond to emails seeking comment.
In August, the Daily Beast reported that now-former CEO Peter Anthony had repeatedly made "sexually suggestive comments about female employees—sometimes within earshot of those female staffers." Anthony denied the allegations. The same story noted the site was the target of a labor complaint over paychecks, which, it said, "came sporadically and with little official documentation."
The source with knowledge of the situation said that since the sale and the appointment of new executives, the environment for staffers has improved.