Stock Picks: F Up, YRCW Down

The government's "Cash for Clunkers" program helped get Ford Motor's (F) engines revving again, as the auto maker on Monday blew past Wall Street estimates and swung to a third-quarter profit. Shares rose 8.3% in midday trading.

Ford, the only U.S. auto maker to decline a bailout, and the only one to avoid bankruptcy, posted a profit of 29 cents a share, up from a loss of seven cents a share in the year-ago quarter. Analysts were expecting a 12-cents-a-share loss.

Raw material pricing helped Ford's vital North American unit turn a profit. That division accounts for about 42% of the company's vehicle sales. 

Ford CEO Alan Mulally said those results allowed a boost to its outlook.

"We are changing our guidance for full-year 2011 from bring breakeven or better to being solidly profitable for both the total company and North American automotive, on a pretax basis excluding special items," he said on Monday's conference call. "We continue to see improvement in the leading indicators for our major markets. With ongoing policy support, financial markets have continued to normalize. We are even seeing some financial market indicators returning to pre-crisis conditions."

Deutsche Bank analyst Rod Lache said Ford's automotive earnings exceeded expectations world-wide.

"Overall, this looks like a very strong quarter," he wrote in a brief research note published Monday. "Global automotive earnings improved by $3.3 billion year-over-year, to come in at $0.4 billion positive vs. last year's $2.9 billion loss. Positive pricing was the primary factor contributing to this upside."

While management said they were still concerned that sales would be affected by the end of the government rebate program, Ford did trim $4.6 billion in costs this year and is operating on a more solid financial footing. Production cutbacks won't be automatically reversed, Mulally said, but Ford is trying to grow as the market for its vehicles improves.

Bottom Line: Hold
Ford has weathered the worst of the storm, but it's still a U.S. auto maker depending on a North American market that's financially battered. This isn't a recovery yet, even if the signals are positive.

Shares of YRC Worldwide (YRCW) went into a sharp skid Monday after the troubled transport company announced the terms of its $550 million debt-for-stock swap, part of its efforts to stabilize its battered finances.

Shares plunged 54% in midday trading, just one trading day after the company announced a narrower third-quarter loss of $2.67 a share, thanks to fewer one-time charges, which made its year-ago results a $12.58 a share loss.

The improvement was relative, CEO Bill Zollars said on a Friday conference call, as the operating environment remains challenging. “We continue to face a difficult economy that appears to have stabilized but has not shown any sustained positive momentum," Zollars said. "We remain cautiously optimistic that the economy has bottomed out, but it is still too early to know for sure. We are not anticipating growth from the economy for the remainder of this year and at least for the first half of next year."

Under the swap, bond holders would exchange about $536 million of debt for new stock, a move Zollars said was critical for the Overland Park, Kan., company. YRC Chief Financial Officer Sheila Taylor said the effect on its credit rating would be significant but brief. "Both S&P and Moody's understand our comprehensive plan and are encouraged by our progress," Taylor said. "They have rules that they follow when companies engage in debt for equity exchange offers like we are launching. These rules will likely result in temporary downgrades to our ratings."

Jason Seidl, an analyst with Dahlman Rose, said the financial engineering is helpful, and while the move could help stave off bankruptcy, the company still has a long way to go. "While we continue to believe that YRCW is likely to survive in the near to medium term, we caution that the company is not completely out of the danger zone," he wrote. "Indeed, the company still has to contend with a challenging macro environment and competition that is less than rational."

David Silver, an analyst at Wall Street Strategies, called the earnings results "ugly," but said YRCW appears able to avoid bankruptcy. While its debt "has ballooned $892 million from the beginning of the year, we think it sits in a better financial predicament that it did three months ago," he wrote.

Bottom Line: Hold
This deal was coming, and anyone who didn't see it hasn't been paying attention to the stock or the company. It will be some time before YRC gets back in gear.