Ford Motor Company (F) stock holders rejoice! If you were concerned the company would not survive a sizable pullback in car-buying activity — it can.
That’s the word from the company anyway, which made the point of assuring owners of Ford stock earlier this week that it’s well-positioned to withstand whatever weakness the auto market experiences. Specifically, auto sales could fall 30% in one year, and Ford would still break even that year.
It’s admittedly a bit presumptuous for Ford — or any other company — to assume it could predict every nuance of an auto-market meltdown. After all, recessions have a funny way of doing the unexpected. Yet, even the most pessimistic owners of Ford stock have to like and believe in the picture painted by the broad brush strokes.
On the flipside, perhaps CFO Bob Shanks would have been better off not detailing exactly why Ford Motor could shrug off an automobile market setback. Not every argument he made perfectly passes the smell test.
Ford Stock: No Biggie
The good news was passed along to analysts at a meeting Tuesday. Shanks explained that the company’s balance sheet, product line and costs structure are much healthier now than they were in 2008 at the height of the financial crisis.
That’s good, because Ford was dangerously close to not surviving that deep-cutting recession.
Fans and followers may also argue that a 30% decline in auto sales in a year just isn’t likely. But it’s not as unlikely as one might think. The worst year-over-year twelve-month stretch hit a pace of 15.2 million autos in February 2008 for an annualized pace of 9.04 million in February 2009. That’s a 40% plunge.
Granted, another 30% plunge would still be an unusual and likely temporary extreme, if it materialized at all, and Ford stands ready to quickly cut as much as $3 billion worth of expenses should such a headwind take shape. The 2008 meltdown was also far bigger than anybody thought possible before it actually happened.
“We Were in Such Bad Shape Back Then”
Shanks made it clear to Ford stock owners that the Ford of 2008 and the Ford of 2016 aren’t one and the same, flatly explaining “We were in such bad shape back then.”
It was an allusion to a stronger balance sheet and a different cost framework. The question is, what’s changed?
The graphic below tells the tale of then and now, comparing the key balance sheet items throughout the crisis to 2016’s equivalent ledger entries.
Long-term debt has been appreciably whittled down. So have inventories. Assets have been whittled down as well, and perhaps most important, current assets aren’t much greater. It is “better,” but not jaw-droppingly so.
As for the income statement comparison, ditto. That is, it looks a little better than the snapshot from 2007 (headed into the crisis), but it doesn’t look radically different, especially in terms of costs. It just looks a little smaller from top to bottom.
Again, some respectable improvements have been realized. To suggest the company is relatively bulletproof, however, might be overstating things. Ford’s record-breaking $10.2 billion last year was helped along by a $2.1 billion benefit on the “other expenses” line.
With all of that being said, there’s a tiny footnote that was largely glossed over in Tuesday’s discussion: Ford can only maintain breakeven operations with a 30% lull in auto sales if that lull lasts a year or less. If that weakness lingers more than a year — as a recession could plausibly cause — Ford will dip into the red ink just like it did in 2008.
Bottom Line for F Stock
None of this is to say Ford stock isn’t worth owning. This reporter owns a small stake of his own.
Current and would-be investors should also know that many of the flexibility measures Shanks referenced are subjective measures that don’t show up on the books.
It is to say, however, no company can perfectly predict and plan for the future, and an adverse future in particular.
If you own Ford stock right now for its potential reward, know that you’re still taking a market-commensurate amount of risk at the price you paid for it.
As of this writing, James Brumley held a position in F Stock.
