The market may love economic stimulus from the Fed, but it obviously acts because the economy is in need of help, and some stocks are more vulnerable than others.
That’s the case with Ford (NYSE:F), where I see risk increasing because of the weakening U.S. economy, Europe’s ongoing struggles and slowdowns in other parts of the globe. Ford’s U.S. business has stayed pretty solid, but I now believe the risks in the U.S. outweigh the company’s growth potential over the next several months. The stock has also been weak recently even in rallies, a sign that investors expect lower earnings for at least for the next few quarters.
F is more vulnerable than a lot of other companies right now because during times of economic turmoil, auto manufacturers’ earnings tend to decline more sharply because of their high fixed costs. For companies like this, lower sales have a more significant impact on the bottom line.
In addition, automakers may need to burn through a lot of cash in tough times, which can weaken balance sheets. I am not expecting serious financial problems for Ford, but investors consider this possibility at times like this, so it is likely to keep some pressure on the stock.
Europe also remains a trouble spot. In the first quarter, sales there fell from $8.7 billion to $7.2 billion, causing Ford’s pretax results in Europe to drop from a profit of $293 million to a loss of $149 million, a total swing of $442 million. If the economy there weakens even more, another drop in revenues would lead to even larger losses. For a while, the North American businesses looked strong enough to outweigh the struggles in Europe, but that is no longer the case with the slowing we’ve seen in the U.S. economy.
For all of these reasons, it is time to sell F. The stock is flat through the first six months of 2012, and it is down about 7% for us over the last couple of years.
I continue to admire Ford’s accomplishments in recent years. It has produced quality cars that consumers clearly want, and as a result, the company is much more competitive – and more profitable with lower breakeven points. Management also deserves credit for regaining the company’s investment-grade credit rating. With the risks we just talked about increasing, however, there are simply better opportunities for our money in the second half of the year.