The February auto data is in and, generally speaking, it’s pretty dismal. But as far as Ford Motor Company (NYSE:F) stock goes, the results are downright depressing.
For February 2017, Ford stock total sales were 207,464, down 4% from last year. The decline was led by a 24% drop in domestic car sales to 50,650, down from 66,613.
The saving grace for Ford stock is that Ford is all about light trucks, which account for about three-fourths of sales. For February, light truck sales grew 4.9% to 156,814. Thus far in 2017, total sales are down 2.5% compared to last year, to 378,650 total sales. That includes a 21.2% decline in domestic car sales to 91,951 from 116,645. Light trucks are up 5.5% to 286,699.
Here’s What Ford Does Right
Now I am not at all interested in Ford stock, but I think that it is worth looking at the things that Ford is doing right, and some of the positive elements that came out of FY16. According to the latest company presentation, Ford was the best-selling brand in the country for the seventh straight year, including the F-series, which remained the best selling truck in the U.S. for the past forty years.
Cash flow is a bright spot. Operating cash flow was $6.4 billion for the year, and cash net of debt is $11.6 billion. One could argue that China may be a future bright spot, as well. For whatever reason, Ford decided to stay out of China and ceded that country to its competitors. Realizing its mistake, Ford moved into the country in 2014 under the Lincoln brand, and this higher-priced product is filtering into its margins. Asia-Pacific margins in 2013 were only 3.2%. Now they are at 7.1%. As market share there increases, Ford should see further improvement.
Now for the Bad News
On the downside, for FY16, wholesales and revenue were effectively unchanged. Market share fell 10 basis points to 7.3%. Operating margins fell the same to 6.7%. Pre-tax income fell 2% to $9.42 billion. (We have to look at pre-tax income because there are a number of complex adjustments that don’t reflect what’s happening operationally at Ford.)
Yet, Ford stock is beholden to another problem, which is its $8.9 billion in underfunded pensions. I hate that the company claimed that this is “modestly higher” than a year ago. Actually, it’s about 8.5% higher, and that’s a lot.
A lot of my problem with Ford shares, other than the fact that they haven’t returned much of anything, is that management seems to be consistently slow on the uptake. China was one blunder. You’ll recall that oil prices went nuts in 2008 in a speculative frenzy. Rather than recognize that this was a blowoff/artificial run, Ford took it as gospel and expected oil prices to be over $100 per barrel for the long term.
Consequently, Ford backed off its large SUV segment in terms of investing in it. Production kind of slogged along, and previous hits like the Expedition (which saw some 200,000 sales annually from the late 90’s through the mid-aughts) saw about 80% of its buyers slowly move to other vehicles. The darn car hasn’t really been updated since 2003 … until now.
F stock, as well as all the other car companies, may also be facing pricing headwinds because of President Trump’s possible border tax.
He’s talked about slapping tariffs on imports, which means car companies would have to significantly raise the prices of their vehicles to the public to offset those taxes. Nothing depresses demand like higher prices, and the auto industry could be badly hit, even if corporate taxes get significantly cut as well.
I’m not loving the situation with Ford stock. I think you can do much better just about anywhere else.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
