Ford Credit

Ford Credit (officially Ford Motor Credit Company LLC) is the in-house bank for Ford Motor Company. Think of it as a financial engine that helps the manufacturing engine run smoothly. Its primary mission is to be a `captive finance company`, meaning its main purpose is to help sell more of its parent company's products—in this case, cars, trucks, and SUVs. It achieves this by offering loans and leases directly to customers and dealerships. This makes it easier for people to buy a new Ford and for dealers to manage their inventory. While it's a separate legal entity, its fate is inextricably linked to Ford's manufacturing success. For investors, understanding Ford Credit is not optional; it's a critical piece of the puzzle for valuing the entire Ford enterprise.

The business model is a classic example of financial services supporting sales. When you walk into a dealership to buy a new Ford, the salesperson will almost certainly ask if you need financing. If you say yes, and you qualify, the loan or lease you sign is often with Ford Credit. The process looks like this:

• You agree to buy a car for, say, $40,000.
• Ford Credit approves your loan. It pays the dealership the $40,000, so Ford Motor Company can immediately recognize the sale of a vehicle.
• You now owe Ford Credit the $40,000 plus interest, which you pay back in monthly installments.

Ford Credit makes its money on the `interest rate spread`—the difference between its own cost of borrowing money and the `interest rate` it charges you. It funds its operations by issuing massive amounts of debt, including `bonds` and `asset-backed securities` (ABS), which are essentially bundles of auto loans sold to other investors.

For a value investing practitioner, analyzing a company like Ford is like examining a two-headed beast. You have an industrial manufacturing business and a massive financial institution rolled into one. You cannot value them the same way. The key is to understand the distinct risks embedded in the finance arm.

This is the most obvious risk. What happens if a large number of borrowers can't make their car payments and `default` on their loans? During an `economic downturn`, job losses lead to a spike in defaults, causing significant losses for Ford Credit.

• What to look for: An investor must scour Ford's financial reports for metrics like `delinquency rates` (the percentage of loans that are overdue) and `loan loss provisions` (money set aside to cover expected future defaults). A rapid increase in either is a major red flag.

Ford Credit is highly sensitive to changes in interest rates. Its business model relies on borrowing money cheaply and lending it out at a higher rate. If its own borrowing costs rise unexpectedly, but it can't pass those higher costs onto new car buyers (perhaps due to competition), its profit margins get squeezed.

This risk is unique to the leasing side of the business. When Ford Credit leases a car, it has to estimate what that car will be worth in two or three years when the lease ends. This is called the `residual value`. If they overestimate it—for instance, if the used car market suddenly weakens—they face a loss when they have to sell the returned vehicle for less than they had projected. This can cause billions in surprise losses.

Analyzing a company with a captive finance arm requires extra diligence. It's a classic `Circle of Competence` test, as championed by Warren Buffett. If you don't understand the basics of banking and credit, you will struggle to value the company correctly.

• Separate the Businesses: Mentally (or on a spreadsheet), split the company into two parts: “Ford Industrial” and “Ford Financial.” You can't apply a simple `P/E ratio` to the consolidated entity. A common valuation method is to value the industrial operations on an earnings or cash flow multiple and then add the tangible `book value` of the financial arm.
• Read the Fine Print: Don't just read the headlines. The juicy details about the health of Ford Credit's loan portfolio, its funding mix, and its risk exposures are found deep within the company's `10-K` annual report.
• A Canary in the Coal Mine: The performance of Ford Credit can act as a leading indicator. If you see its loan losses start to creep up, it might be an early warning sign of broader economic trouble or specific weakness in Ford's customer base. It tells you what's happening on the ground before it shows up in the parent company's sales figures.