Ford Motor Company (F): This Company’s Stock, One Serious Problem

What inflates the number
Low interest rates are supposed to be a good thing. They certainly allowed Ford Motor Company (NYSE:F) to borrow money cheaply and use it to offer discounts to help sell cars or other company interests. But these rock-bottom rates also inflate the underfunded pension number, because they cause Ford to lower its discount rate, which essentially defines how large pension requirements need to be. Ford had to lower its rate from 4.6% to 3.84%, appearing to wipe out any progress it made on paying into the pension funds over the past year.

But hang in there, There is good news, too!

From debt to surplus
Let’s say that in eight years, the housing market has steadily improved, the automotive market has been healthy, the economy is more stable than ever, and politicians are working together in harmony. Well, OK, scratch the part about the politicians. Anyway, imagine, too, that interest rates have risen for the past few years and the discount rates have followed. This hypothetical situation would significantly change the look of Ford’s underfunded pension. It would narrow the gap, and it’s possible that if Ford had been diligent in paying into the fund, the company could actually be looking at a pension surplus! This is a real possibility, and can you imagine how the stock price would react if it happened?

Bottom line
Back here in the real world, interest rates are likely to be low for at least two years, so what is Ford doing now to fix this issue? In 2012 it paid $3.4 billion into the fund. It’s been executing a plan to offer buyouts to salaried workers, which knocked off about $1.2 billion in obligations. And it’s committed to putting $5 billion into the fund this year, with plans to have a fully funded pension by mid-decade.

If Ford Motor Company (NYSE:F) handles this underfunded pension just as it dealt with its pre-recession loan — which, again, is now paid off — this goal is certainly achievable. If discount rates rise, even a surplus is possible. Either way, the issue should be much easier to deal with in the future. I’m bullish on the automotive industry and its companies, and I’m especially bullish on Ford.

The article Ford’s Stock: One Serious Problem originally appeared on Fool.com.

Fool contributor Daniel Miller owns shares of Ford. The Motley Fool recommends and owns shares of Ford.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.