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4 Tough Challenges Facing Ford Stock

With U.S. auto sales surging on pent-up demand, cheap credit and a wide selection of hot new models, shares of Ford Motor Company (F) should be soaring. Instead, Ford stock has lost more than 15% in the past six months and slumped further this week on the heels of an analyst downgrade.

Ford logo ford stockThe stock has performed well in the past and its market is continuing to expand. So why is Ford is lagging many of its S&P 500 peers? Let’s break down some of the challenges the automaker is facing now.

Plummeting Gas Prices

Ford made a very big bet on fuel efficiency, which may not pay off with increased sales now that gas is so much cheaper. In one of the boldest moves in recent history for Ford, the company bet its top-selling F-Series pickup on a fuel-efficient, aluminum-sided version of the F-150 that boasts 29% better fuel efficiency.

Unfortunately for Ford, by the time the new aluminum pickups began rolling off the assembly line in Dearborn, last month, gas prices had tanked — taking away the justification for auto buyers to pay a big premium for the new model. Early trends have not caused Ford to rethink plans to launch an aluminum version of its Super Duty F-Series pickup.

International Troubles

Ford has been navigating Europe’s troubles for the past three years — beginning with the European debt crisis and evolving through higher pension costs and potentially seismic shifts in buying behavior.

Problems in Russia are of particular concern. From the political crisis in Ukraine,  to currency fluctuations and a rapidly deteriorating Russian economy, the country’s woes are hurting Ford’s results. South America also is struggling and currency exchange issues have slammed profitability. Ford expects a $1 billion loss in its South American operations alone.

Recall Woes

Although the word “recall” often brings to mind General Motors Company (GM), Ford has had its share of glitches in 2014. The automaker has recalled around 4 million vehicles for various reasons this year. For example, it recalled some of 850,000 of its C-MAX, Escape, Fusion and Lincoln MKZs in North America over an electrical glitch.

Ford has boosted its recall reserve to $1 billion, including $500 million for the electrical problem, which could prevent airbag deployment in case of a crash. In October during his first earnings call as CEO, Mark Fields said Ford’s pre-tax profit was $1.4 billion lower than a year ago — driven by lower volume, higher warranty costs and currency exchange effects.

Sluggish Sales

Perhaps the biggest skunk in Ford’s most recent quarterly results was a sales decline. Fields attributed some of the decline on Ford’s aggressive new vehicle launches. The company is launching 23 new models this year — 12 of which were completed by the end of the third quarter. Investors also reacted to Ford’s sluggish monthly sales report in November. Sales slipped by 1.8% compared to the same month last year.

Bottom Line

It’s tough to follow a superstar CEO and Alan Mulally, the aerospace engineer who saved Ford, avoided bankruptcy and developed “the Way Forward,” is a tougher act to follow than most. Since taking the wheel on July 1, Fields has shown analysts that he knows the inning and the score – admitting that Ford’s full year profits could come in as much as $2 billion lower than the company’s earlier guidance. Ford stock took a hit and some analysts waxed nostalgic for the days when Mulally’s Ford consistently beat estimates.

That said, I think the basic value proposition for Ford stock is sound despite some near-term headwinds. I think F shares probably will decline by another 5% over the next several weeks — particularly if the new aluminum F-series pickups fail to capture the attention (and wallets) of buyers.

International headwinds are par for the course and the currency problems in Russia and South America could ding Ford profits in the first half of 2015. But with a 3.3% current dividend yield, Ford stock is fairly valued now and could become a bigger bargain over the next few weeks.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2014/12/ford-cheap-gas-f-headwinds/.

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