Ford Production Cuts Continue to Make Impact

Production cuts continue to ripple through the supply chain following Ford's fourth-quarter 21% production cut announced earlier this month, according to Bear Stearns.

"Our companies have generally attributed few cuts to date to subsequent announcements out of GM (12% cut) and DCX (not quantified)," Bear Stearns said in a release. "However, we directionally expect modestly more cuts to follow as the industry digests the second wave of lowered production forecasts.

"According to the London Free Press, a regional newspaper in Ontario, ACW will lay off 48 (roughly 10%) of 450 workers at its Ontario plant on Sept. 15. The plant produces wheels for Ford's F-series pick-up trucks as well as heavy- and medium-duty trucks. At least through calendar year-end, we believe there's sufficient demand for commercial vehicles to absorb most of the Ford cut at ACW. By mid-1Q:07, we expect the landscape to turn more negative.

"Remarking on the Class 8 environment, the chairperson of CAW Local 1001 said to the London Free Press, "not much [is] on the board now for '07 -- everyone is so busy pre-buying." We believe the market is overlooking a critical data point -- that 95% of the backlog as of July 31 was slotted for 1Q:07 and earlier, based on A.C.T.'s data. Modestly better-than-expected recent Class 8 orders generally reflects a bigger pre-buy, not market acceptance of the '07 engines yet, in our view.

"We trimmed our 4Q EPS to $0.51 from $0.53 (vs. consensus of $0.51) to reflect the cut in production. In addition, we transitioned coverage of ACW from Transportation Equipment to Autos & Auto Parts, with no change to our Peer Perform rating. We do note that we're Market Underweight in Automotive (vs. Market Weight in Transportation Equipment)."