Wednesday, March 22, 2006

Ford Recovery?-Not According to Insider Sales

Confidence in Ford’s (F) recovery is greatly undermined by looking at the insider sales at the company. At least that's my view. Though the auto stocks may well be buoyed today and near term by the news of the GM, Delphi, UAW agreement, follow the capital of the insiders.

Though lots of people wish to speculate in the North American automakers, turnaround prospects seem to be too distant to commit any capital at present. Healthy businesses with fairly steady high returns are being sacrificed to maintain highly cyclical, low return, capital intensive businesses.

Lots of decent value buyers have stepped up to the plate. I hope for their sake, and for the sake of my many friends from my hometown of Windsor, Ontario directly South of Detroit, that they are right. I recognize that if I wait for complete clarity and assuredness, I will miss the bottom in these stocks. Yet, given the deteriorating profitability, and the weak financial standing, I just can’t do that to myself, let alone my clients.

Here is the record of insider sales at Ford.

Note that GM insiders, in a very modest way, have actually made some purchases of their stock, well at least exercising options and not selling the stock.

James Pradilla, the chief operating officer and president of Ford has reduced his exposure to the company from 500,615 shares as of March 11, 2004 with the exercise of roughly 330,000 stock options to a remaining 152,742 shares. Mr. Padilla has been chief operating officer and Chairman of Automotive operations since April of 2004.

Admittedly, Mr. Pradilla has received a large position in stock options as of March 10th of this year, almost 900,000 options exercisable at $7.83. In addition, he has received a gift of some 230,000 restricted shares. I stress gift…not a commitment of his own capital.

Nevertheless, options in my view represent simply a side bet on the market rather than a commitment to the company and a commitment of capital. Mr. Pradilla, through his option exercises and subsequent sales, ended up with less commitment to the stock than the level with which he had commenced the year.

How can he expect any of us to do anything other than follow his lead?

Disclosure: I, my family, and clients do not have a position in Ford or GM.


At 5:41 PM, Blogger NO DooDahs said...

Here's a joke for you:

Question: What kind of value investor buys a stock with a debt-to-equity ratio over 11?

Answer: An unprofitable one!

Their debt-to-tangible-equity ratio is over 20. Interest payments take up over a quarter of their pre-interest operating cash flow. Their ROA is less than on half of one percent.

Don't give me any "value" talk about how they've got more cash per share than the shares are trading for, since the debts would eat the cash ... they trade for less than 8 cents on the dollar of revenues for a reason ...

This is not to say that F might not make a good trade, or might actually have decent appreciation on the stock, etc. As a company, the business sucks. Meaning that a true value investor should stay away.

At 9:14 AM, Blogger Andy Kern said...

Of course, Padilla is going to need to sell a few shares if he is anticipating a big pay cut like the GM execs took...


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