In the long-running “value play or value trap?” debate over Ford Motor Company (NYSE:F) stock, I’ve generally taken the “value trap” side. Ford stock is cheap, trading at 7.4x 2017 analyst EPS estimates. With F stock yielding more than 5%, I can, perhaps, see an argument for income investors to consider the stock.
But, I still believe Ford has a major problem: the very real likelihood of “peak auto.” Increasing penetration of electric vehicles and the long-term influence of autonomous driving both represent long-term concerns for F stock.
Ford appears behind in both of those categories, one reason the company’s CEO was replaced earlier this year. I’m skeptical that will be enough for Ford to catch up, however. And in the mid-term, a clear glut of used cars and lower fleet sales both provide headwinds as well.
The uncertain outlook seems to justify the low price and multiples assigned to Ford stock. And, it’s enough to offset some recent modestly positive news that, I’ll admit, made me take a second look at F stock.
June Sales Weren’t That Bad
Ford’s U.S. June unit sales of roughly 228,000 were down 5% year over year. While the decline isn’t necessarily bullish for Ford stock, the figure did come in ahead of expectations. (Kelley Blue Book estimated a nearly 10% drop, for instance.) Through the first half of 2017, Ford sales have fallen less than 4%, a slower rate of decline that many F stock bears predicted at the start of the year.
Meanwhile, which cars were sold is just as important as how many, and there was good news for Ford on that front. Passenger car sales fell a whopping 23% year over year for the month. But, SUV sales rose 3%, and truck sales edged up 1.2%. Year to date, SUV and truck sales each are up nearly 3% against 2016 figures.
That’s important for Ford, and potentially a boost for F stock. SUVs and trucks, obviously, have a higher sticker price, meaning the 5% decline in units should actually lead to an increase in total revenue. More importantly, U.S. automakers like Ford and General Motors Company (NYSE:GM) make higher profits on those larger vehicles. Analysts are still expecting a year-over-year decline in Q2 EPS, but the truck and SUV sales might imply that Ford has a decent chance to beat Q2 estimates later this month.
Can China Boost Ford Stock?
Meanwhile, Ford had an impressive month in China. Unit sales there rose 15% in June, clearing 100,000. Lincoln sales rose 84%, and are up 97% year over year through the first half.
Ford has lost market share in China of late to Japanese rivals like Toyota Motor Corp (ADR) (NYSE:TM). And year to date, unit sales in the country are still down 7%. But, the market as a whole had a strong month, and might be set up for a strong second half. If Ford can keep improving its performance in that key market, some of the pessimism toward F stock could abate.
Trump Could Be a Plus for F Stock
President Trump has repeatedly cited his desire to focus on jobs, and the Big Three automakers — Ford, GM and Fiat Chrysler Automobiles NV (NYSE:FCAU) — would seem potential beneficiaries of those efforts.
So far, there’s been little movement on that front. But, a review of Obama-era regulations on fuel economy could be a sign of what’s to come. That rule probably doesn’t do a lot for Ford, or Ford stock, just yet.
But, if the GOP administration decides to help the auto industry and/or change fuel economy standards, it could be a big win for F stock. Any regulations that minimize the requirement to build small and/or electric cars — where Ford generally loses money — could provide a boost for Ford stock. Betting on that outcome is probably unwise, though. But, there is reason for F stock holders to hope that the Trump administration could make things easier for Ford.
Not Enough to Turn Bullish
All told, there have been some modestly positive developments for Ford stock of late. But, I don’t think they’re quite enough to offset the very real concerns surrounding F stock. Truck and SUV sales still are catching up from the financial crisis lag, and no doubt benefiting from lower gas prices. Once they begin to decline — whether from longer lives or simply a change in the economic cycle — Ford earnings will come down sharply.
Fleet sales continue to be pressured, as rental car companies like Hertz Global Holdings, Inc (NYSE:HTZ) and Avis Budget Group Inc. (NASDAQ:CAR) struggle. And, one month doesn’t change the mid- and long-term trends in China.
Ford still looks like a business whose earnings are set to decline, and Ford stock is priced as such. It will take a lot more good news to change both those facts.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
