Ford Motor Company (NYSE:F) CEO Mark Fields last week said car sales are “still healthy.” Maybe they are. But, in light of March’s embarrassing shortfall by every nearly major name sold in the United States — including the venerable General Motors Company (NYSE:GM), the fact that Ford’s sales in China fell 21% last month and Ford stock is within sight of a four-year low — it’s difficult to embrace his optimism.
On the flipside, stocks have a funny way of proving that it’s darkest before the dawn. Could the pessimism that everyone except Mark Fields is feeling be one of those sneaky buy clues that becomes obvious long after it matters?
Or, maybe F stock really is the lost cause the market is saying it is.
A Matter of Perspective
In Fields’s defense, weaker car sales so far this year followed a 2016 that saw unusually, unfairly strong automobile purchases. So, a relative lull here isn’t necessarily anything the industry has to be ashamed of.
On the other hand, that’s not the way the world works. Fair or not, investors are a “what have you done for me lately?” kind of crowd. If a company or an industry isn’t always making forward progress, it’s treated like a reason to at least be skeptical, if not outright bearish.
Back to the original hand: With F stock presently valued at a trailing P/E of 9.7 and down 38% since its early-2014 peak, isn’t this worst-case scenario already baked in?
That’s the crux of the dilemma traders are facing with Ford, even if they don’t realize it. For what it’s worth though, the pros aren’t terribly optimistic.
Bank of America Merrill Lynch’s chief economist Michelle Meyer, is one of those concerned analysts. Though not an outright bear yet, she recently explained to CNBC’s Fast Money crew that a combination of rising subprime auto loan delinquencies and a looming onslaught of used car inventory could put the brakes on the new car business in a hurry.
She didn’t quantify the auto loan delinquency headwind, but she didn’t have to — Morgan Stanley did, pointing out that as of the end of last year, 4.51% of subprime car loans were delinquent (more than 60 days late). The prior peak delinquency rate was 4.69%, in the third quarter of 2008.
The counter-argument is that this has nothing to do with overall demand for new cars, or their purchase. Thing is, it does have something to do with it. Rising delinquency rates force lenders to broadly raise the bar on qualifying for a loan of any sort. (Not unlike the subprime mortgage meltdown of 2008, it “didn’t affect everyone” right up until the point it did.)
It’s not just rising loan delinquencies working against GM and Ford stock, though. As Meyer noted, a sizeable wave of used car inventory is looming, making it easier for a potential new car buyer to opt for a low-priced, quality used car instead.
Were this the first that we are hearing this, it might be easy to dismiss, but isn’t.
Morgan Stanley said the same thing earlier this month, suggesting the same surge in new car sales — and leases — seen over the course of the past four years will now lead to a massive number of trade-ins and lease turn-ins. All told, Morgan Stanley thinks the average price of a used car could realistically fall 20% through 2021, with a long-shot downside projection of a 50% decline in used car prices.
In that scenario, Ford stock holders have good reason to be concerned.
Looking Ahead for Ford Stock
Shares of Ford are at a pivotal technical point. For the third time since early 2016, F is finding support around $11.50. This could become a triple-bottom, finally catapulting Ford stock out of a long-term downtrend. Or, the support level could buckle, opening the sell floodgates.
Of the two possible outcomes, the more plausible one — unfortunately — is the breakdown. F stock performed poorly even when it joined the rest of the industry in growing their top and bottom lines. With those numbers starting to taper off, it’s unlikely shares will fare any better. They’re actually could fare worse.
Again, right or wrong, the bulk of a stock’s direction is driven by the comparison to yesteryear.
As of this writing, James Brumley was long F.