The shares of Ford Motor Company (NYSE:F) have gotten off to a inauspicious start this year, down about 7%. Unfortunately, this kind of performance has been the norm for some time. Since the summer of 2014, F stock has lost about 37% of its value.
Yes, it’s been an awful ride. But then again, with its price-earnings ratio at a rock-bottom seven times forward earnings and a hefty dividend of 5.3%, could Ford stock be a value play?
By comparison, General Motors Company (NYSE:GM) yields 4.5% and Toyota Motor Corp (ADR) (NYSE:TM) clocks in at 3.6%.
These factors typically make for a value play, for the most part. Yet despite this, I advise caution, as F stock still has some major challenges. Let’s take a look:
Ford Stock Issue #1 – Scale
Having massive global scale has always been critical for the auto industry. Let’s face it, the capital costs are enormous. This is why most startups in the industry have failed, with only a few notable exceptions like Tesla Inc (NASDAQ:TSLA). Yet scale may be even more important nowadays.
According to Fiat Chrysler Automobiles NV (NYSE:FCAU) CEO Sergio Marchionne, an auto manufacturer needs to sell 15 million vehicles a year to remain competitive. A big part of this is the need to keep up with the demands for new technologies.
Considering this, it should be no surprise that Marchionne wants to merge with rival GM. (Note that his company delivers about 4.7 million a year globally.)
As for Ford? Unfortunately, the volume is also relatively low, with 6.65 million deliveries last year. So unless the company seeks out a merger partner, it could be tough to keep up with the mega operators in the industry.
Ford Stock Issue #2 – Technology Disruption
Technologies like cloud computing and artificial intelligence (AI) are rapidly changing the landscape of the auto industry. A notable sign of this is Intel Corporation’s (NASDAQ:INTC) proposed $15.3 billion acquisition of Mobileye NV (NYSE:MBLY), which is a top chipmaker in the category. According to the press release, the market size for next-generation auto technologies is expected to reach a whopping $70 billion by 2030.
Of course, other mega tech operators are gunning for this opportunity, including Apple Inc. (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOGL,NASDAQ:GOOG) and Uber.
So what about Ford?
The good news is that the company has been ramping its efforts. For example, Ford recently announced a $1.2 billion investment in Canada, which involves building an R&D facility as well as hiring 400 engineers from BlackBerry Ltd (NASDAQ:BBRY).
But the efforts will still be a challenge. For the most part, it will be tough for Ford to integrate a software group within a traditional automaker. Besides, with slim margins and less global scale, the company simply does not have the resources of the mega tech operators or the auto giants, such as TM, BMW and GM.
Ford Stock Issue #3 – Economic & Political Situation
Last year saw another record performance for the U.S. auto market, with sales hitting 17.55 million (the prior record was set in 2015 at 17.47 million). Keep in mind that there have been increases for the past seven years, which has never happened.
Despite all this, Ford’s performance was a flat line. This was even though the company’s F-Series continued to be the best-selling vehicle in the U.S. (820,799 sold).
Yet, the U.S. auto market is likely to decelerate in 2017. Just some of the factors include rising interest rates and the expected flood of vehicles coming off leases, which will likely dampen sales of new cars. There may also be volatility with oil prices, especially given the recent problems in the Middle East.
And yes, the Trump policies may have an impact. After all, a border-tax is likely to make it more expensive for companies like Ford, which have substantial overseas production.
Stay away from Ford stock until the road ahead looks clear.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
