One of the more remarkable turnarounds in the markets over the past decade is Ford Motor Company (NYSE:F). For years, Ford stock struggled as the company rumbled out a litany of boring cars. But once former CEO Alan Mulally crystallized a comeback strategy, things started to change dramatically. F stock no longer was a useless relic, and started to garner serious interest on Wall Street.
Mulally is credited with bringing to life a four-point strategy dubbed the “One Ford Plan.” Most of them deal with financial and operational efficiencies — hardly unique concepts. One point, however, sticks out: “Accelerate development of new products our customers want and value.”
For far too long, the iconic auto manufacturer was ignoring trends within the industry, to the detriment of F stock. Mulally put them back on track, despite the enormous headwinds of the Great Recession.
Of course, the markets are all about what’s going to happen next. With Mark Fields stepping into the chief executive role, how will Ford stock respond? While the auto industry faces tough challenges, F is making inroads into key international sectors.
According to InvestorPlace contributor Laura Hoy, F stock has benefited from $138 million in pre-tax profit as Europe’s “best-selling commercial vehicle brand.” In the Asian-Pacific market, there were one million units sold. Additionally, the company invested in Zoomcar, which would tap into India’s car-sharing ecosystem.
At the same time, you can’t ignore the core U.S. market. The automaker did not provide great guidance ahead of waning domestic demand. In fact, they flat-out admitted that they will “slow its production in order to cope with a more difficult sales environment.” This is not a confidence boost for Ford stock.
Shifting Consumer Trends Dog Ford Stock
What’s particularly worrisome for F stock is that inventories for many car models are running high. Here, consumer tastes are shifting back towards SUVs. That means F, General Motors Company (NYSE:GM), and Fiat Chrysler Automobiles NV (NYSE:FCAU) have a ton of compacts, sedans and minivans on their books to unload.
Consumers who were in the market for such vehicles might rejoice, but it’s no laughing matter for Ford stock owners. There has been a rising level of days inventory since 2010, but this metric has accelerated in recent quarters. For its third quarter of fiscal year 2016, F stock reported a near-9% increase in days inventory. That will likely get worse before it gets better.
I’m also curious how Ford stock will respond to the army of Japanese cars with whom they will clash. Toyota Motor Corp (ADR) (NYSE:TM), Honda Motor Co Ltd (ADR) (NYSE:HMC), Nissan Motor Co Ltd (ADR) (OTCMKTS:NSANY) and others aren’t going to take this lying down.
Japanese Competition Could Eat F Stock’s Lunch
With Japanese carmakers in the mix, the SUV consumer trend actually poses a three-pronged dilemma for F stock. First is the obvious one — how to get rid of anything that’s not an SUV. The second is a tricky one — how to convince American buyers to buy American. Unless you live deep in the heart of “Trump Country,” Japanese cars dominate the roadways. Even then, I’m sure you’ll find more than a couple.
But the most problematic and ironic problem is the presidential transition. Donald Trump has not been afraid to take on our most vaunted institutions, including the U.S. Federal Reserve. Rightly or wrong, he’s called out the “artificial,” “rigged” economy. If Trump’s bite is as bad as his bark, U.S. dollar strength will be one of the hallmarks of his economic policy.
Of course, a robust dollar is a double-edged sword. It’s a boon for consumers, but it can be terrible for exporting industries. Say what you want about “Make America Great Again.” I can virtually guarantee you that foreign powers aren’t going to dig deeper in their wallets to make that slogan a reality. Instead, they’ll seek lower-priced alternatives. Hello Japan Inc., goodbye Ford stock.
Ford Stock Is Cheap, But Not a Great Value
This brings us to the ultimate point. Is F stock “cheap” at its current price? Absolutely it is. But is it a good value? Here, I have to disagree. Proponents of Ford stock can point all day long to the price-to-earnings ratio being under ten digits. But that’s not necessarily a good thing.
Profitability margins for F stock are middling compared to the rest of the auto industry. Ditto for revenue growth over the last three years. Now, you’re telling me that American buyers are abandoning the type of cars Detroit invested heavily in to compete with the Japanese. On top of that, American cars are going to be more expensive for foreign buyers.
These circumstances put Ford stock in a bitter and grueling dogfight. I’d like to believe that there’s one more big run left. However, this is undoubtedly a major risk. There are far easier ways to make money than investing in F stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.