Ford Motor Co. aims to regain the investment-grade credit rating it lost as the company plowed through a series of problems and reorganized its business by dropping unprofitable passenger cars from its product portfolio prior to the COVID-19 pandemic.
“Clearly it is a top priority,” said Brian Schaaf, Ford Credit’s chief financial officer said during a conference for analysts organized by J.P. Morgan. “We want to have the strongest business possible.”
Schaaf added the credit-rating agencies are slow to comment on the changes. “They’re a little slow at times,” he said.
But Ford is certainly moving in the right direction with its strong balance sheet and strong operating performance. Ford Credit posted record earnings before interest and taxes or EBIT in the second quarter of $1.6 billion, he noted — returning more than $400 million directly to the company.
Used car prices boost earnings
Part of the reason for the record profits was the rise in residual value of vehicles leased to consumers by Ford Credit as the value of used cars has risen across the board, Schaaf said.
“It’s a good time to be in the used-car business,” he said.
The increase in used-car prices has probably peaked for this year, Schaaf said, citing a new report from Cox Automotive, observing the price of used vehicles sold in auction stopped climbing in June.
Early this week, the federal Bureau of Labor Statistics reported used vehicle prices increased just 0.2% in July, which down from a 10.5 % in June alone, which helped cap off a 30 % increase since the start of the year.
Economists have said the rise in used car prices has contributed to the inflationary pressure apparent in government statistics. Excluding volatile food and energy prices, the CPI increased by 0.3 percent in July, about one-third of June’s pace, the Bureau said.
Sales of used cars are slowing down as well, falling 15% last month compared with the year-ago result. They were down 3.4% from 2019 as well.
Economic outlook for auto industry is positive
However, the underlying economic picture is very positive, Schaaf said. The U.S. economy is on steady path and employment levels are encouraging, plus the delinquency rates on loans issued by Ford Credit also is “very low,” he added.
The pandemic remains a great concern, but the government support programs appear to be working well and the picture, while certainly frustrating, is not as dire as with the uncertainty prevailing a year ago, Schaaf suggested. However, the semiconductors shortages are cutting sales of new vehicles. The semi-conductor will inflate used car prices, going forward, he said.