Massive Debt Makes Ford a Stock to Buy Now
Narrowing the many reasons to buy Ford down to one specific reason is rather difficult. In fact, I'll probably write different angles using as many as 20 total reasons why you should consider buying Ford stock. Many investors already know that Ford touts the auto industry's top CEO in Alan Mulally, who orchestrated one of the most impressive corporate turnarounds in history. We know that Ford's global consolidation of platforms, with its plants running at high capacity, has created financial stability it hasn't seen in roughly a decade. Ford's consumer loyalty and vehicle popularity are soaring at the perfect time to take advantage surging U.S. vehicle sales - which drive almost all of Ford's profits.
All those lovely factors aside, here are two additional great reasons to consider buying Ford stock.
We want more debt!
That subtitle isn't something heard very often in the investing world. However, Ford investors wouldn't mind at all if the debt levels increased! Let me explain a little bit about Ford's debt.
The majority of Fords $105 billion in debt actually falls under its Ford Motor Credit finance division - however, it isn't separated out this way when looking at the balance sheet. Ford's automotive debt, which is typically what people believe the $105 billion represents, is only about $16 billion.
If an investor knows that much about Ford's debt, then he's already doing better than most. Here's the kicker, though. That massive amount of debt in the finance division actually makes a very healthy profit. In fact, Ford Motor Credit was responsible for $1.7 billion of Ford's $7.7 billion pre-tax profits last year.
FMC generates revenue through a handful of ways, but the obvious one is on the interest collected from its consumer loans. Using an auto loan calculator, with inputs for a $25,000 vehicle paying $500 a month on a 3% loan, Ford will make an additional $1,739.80 in to- line revenue from the transaction. This helps increase company margins, revenues, and - since Ford has secured these massive loans at very low interest rates - it boosts the net income significantly as well.
Here's another reason to love Ford's massive debt pile.
During credit crunches it enables Ford to keep, and even attract, new customers with its stable credit line. During the great recession, General Motors and Chrysler lost their credit units but Ford was able to keep its. While sales continued to tank, those who needed to purchase vehicles had a much harder time finding credit - which was something Ford could provide that its competitors could not. There is no doubt that it played a small role in Ford's return to profitability in 2009, shortly after its crosstown rivals claimed bankruptcy.
This is often a misunderstood part of Ford stock as an investment, and investors should be happy if Ford's debt continues to increase from its finance division. It's a huge competitive advantage for Ford and will continue to strengthen the company's margins, revenues, and earnings. Bring on the debt!
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The article Massive Debt Makes Ford a Stock to Buy Now originally appeared on Fool.com.Fool contributor Daniel Miller owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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