Why Ford Stock Dropped 5% This Morning

What happened

Ford Motor Company (NYSE: F) stock got hit with a quick 5.3% drop in stock price Tuesday morning. But just as quickly, it turned around, climbed back up, and ended the day down only 1.4%.

The reason for the drop was quickly traced to its source: Moody's Investors Service, which yesterday downgraded Ford senior unsecured debt from the just-barely investment grade of Baa3 to the "junk" status of Ba1. 

Exclamation point inside a yield sign.

Image source: Getty Images.

So what

According to Moody's, Ford faces "considerable operating and market challenges" and will likely report "weak earnings and cash generation ... as the company pursues a lengthy and costly restructuring plan" costing an estimated $11 billion (non-cash, or $7 billion cash) over "several years." Moody's worries that Ford's cash flow will "remain weak through the 2020/2021 period."

And yet, Wall Street analysts were quick to leap to Ford's defense, helping to erase some of the day's earlier declines. In a note this morning, Merrill Lynch called the effect of this downgrade "de minimis at present" for Ford because the company doesn't have any significant amount of debt coming due any time soon -- and thus won't have to offer significantly higher interest rates to roll over any debt.

Likewise, Credit Suisse said the Ford story has not been changed, reports, because Ford still has "ample liquidity, with $23B of cash on its balance sheet plus an $11.4B revolver," and its debt is furthermore still rated as investment grade by S&P and Fitch.

Now what

This appears to be a case of "two out of three ain't bad for Ford." So long as S&P and Fitch think the company's in fine financial fettle, there shouldn't be any need to worry about Ford's ability to access capital -- or maintain its ample 6.3% dividend yield.

That being said, now that Moody's has gone negative on Ford debt, there's an increased chance one of the other ratings agencies will decide to follow suit. If and when that happens, things will start to get more complicated for Ford. The time to start looking out for such a development is now.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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