Best Ideas Portfolio holding Ford () announced Thursday that the company intends to sell $1.5 billion in new, 5-year bond issues. This marks the first time the company has issued debt since receiving an investment-grade credit rating from Moody’s on May 22. According to Bloomberg, the bonds will carry a spread premium of 240 basis points relative to US Treasuries.
We continue to hold the automaker in our Best Ideas Portfolio, and we think the firm represents one of the more compelling investment opportunities in our coverage universe. Though some sectors of the US economy may be soft, the auto industry is enjoying a strong, sustainable recovery, in our view. Unfortunately, investor sentiment about the company’s European profitability has been negative, which has obscured the true value of the firm, in our view.
The biggest risk to Ford is not pensions or liquidity, but rather poor profitability in China and Europe. If these concerns fall by the wayside, we think there’s an increased likelihood the market will fully appreciate Ford’s more profitable and robust business. We expect the automaker to resume convergence to our mid-$20s fair value estimate.