Off the Mark at Ford Credit

Ford Credit Co. took it on the chin last year, suffering through arguably its worst year since Henry Ford founded the captive to finance Model Ts for the masses. The first quarter might not be much better.

As financial services companies begin reporting earnings this week, I found a data point in Ford Credit's 4Q08 earnings presentation that portends more fiscal pain at the nation's largest automotive financing company.

Last year, Ford Credit's $1.54 billion net loss can be, in part, attributed to its overzealous forecast for car sales. Ford Credit over-projected the SAAR for US car sales in 2008 by nearly 16%, and that led to hefty

losses. (Ford Credit also overestimated Europe car sales.)

So how is Ford Credit doing on its 2009 SAAR projection? Not good. Ford Credit, in its 4Q earnings presentation to fixed-income investors, said it was modeling for a 2009 SAAR of 11.5 to 12.5 million units in the US. Last month, the SAAR was 8.8 million; the average SAAR through the first three months of 2009 was 9.17 million units. That does not bode well for Ford Credit. If the fourth quarter of 2008 is any indication, Ford Credit's 1Q09 numbers will likely bleed red.

I am not suggesting that 9.17 million is the final SAAR for 2009 -- who knows what the final number will be? But when thinking about the first quarter earnings at Ford Credit, a 20% over-estimation of car sales (at the least) is bound to produce sanguine results for the captive.

Tags: f, ford, ford-credit, saar

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Comment by Frank Rauscher on April 29, 2009 at 11:46am: I am at a loss for words. Are you saying that the $1.54 billion net loss includes some HUGE amount of operating overhead (primarily staff salaries) for the anticiapated SAAR increase?
Surely, they are not saying that income from subvention activities is accrued at an accelerated rate when received and is used to offset repo losses, floorplan losses, and foreclosed dealer capital loans.
Could you illucidate me on the details of how that drop in volume caused such large losses if not in my 2 examples. I would appreciate the education.

Comment by JJ Hornblass on April 29, 2009 at 2:54pm: I am saying Ford's financial model was off and a $1.54 billion net loss occurred. Operating overhead would be one contributor to that, which is why I said the net loss was "in part" due to the errant forecast. I view the SAAR as a marker of the forecast Ford Credit used internally to project its financial performance in 2008.

Comment by Frank Rauscher on April 30, 2009 at 1:17pm: Thanks for the clarification. Sounds like Ford Credit needs to say "You're Fired!" to someone.

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