Right now, Ford Motor Company (NYSE:F) looks awfully cheap. F stock trades right at 7x analyst estimates for 2017 earnings per share. That multiple has compressed even as earnings have grown of late, to the point that Ford stock now trades at a four-year low. Heck, the company posted solid guidance last week and the market shrugged.
But I still don’t think Ford stock is cheap enough. Longer-term concerns still persist relative to autonomous driving and its impact on automotive sales and usage. Tesla Inc (NASDAQ:TSLA) — who passed F stock in terms of market capitalization earlier this month — likely will take at least some share in the U.S. over the next few years. International economies still look choppy at best, and Ford trails General Motors Company (NYSE:GM), among others, in China.
The near-term concern weighing on F stock, however, is the growing consensus that U.S. auto sales have peaked. Inventories are up, but March sales were the slowest in two years. Pent-up demand from the financial crisis largely has been met; record-low interest rates that boosted auto lending are starting to rise. So are delinquencies.
That’s why earnings didn’t move Ford stock. Q1 isn’t the concern. The concerns is that auto sales have peaked — and that the industry will change before the next peak comes around.
U.S. Auto Sales Appear to Have Peaked
It’s starting to look like U.S. automotive sales are in decline — a decline that may last several years.
Earlier this month, a Toyota Motor Corp (ADR) (NYSE:TM) executive predicted an industry-wide decline and said his company’s discounts already were elevated. Subprime delinquencies are back near crisis-era levels. Increased demand for securitization — an echo of the housing bubble — appears to have led to loosened credit standards for riskier borrowers, with the bill now coming due.
Seasonally adjusted sales already have dropped in each of the first three months of 2017 — and most observers are predicting additional pressure over the rest of the year. Ford itself saw a 7% decline in sales in March, though the drop in retail sales was just 2%. Ford did guide to a reasonably strong performance over the rest of the year, and GM did as well. But Ford is expecting a year-over-year profit decline — which only adds to the long-term concerns.
It’s hard to get too excited about F stock without some sort of growth potential, at some point. And if the U.S. market is declining from here on out, it’s hard to see what else Ford can do to drive that growth.
What Else Can Drive Ford Stock Higher?
The problem for F stock is that it remains perilously dependent on U.S. retail sales. Ford has a small presence in China, and sub-3% market share in India. Macro and currency factors make the European market difficult — GM wisely chose to exit the continent earlier this year.
There’s another, less-publicized pressure: fleet sales. Fleet sales are about 11% of Ford’s business, according to its January sales call, and were flat last year and guided flat again in 2017. On the Q1 conference call, CFO Robert Shanks attributed the company’s lower U.S. market share solely to fleet declines. Ford maintained its 2017 projection after Q1 — but the longer-term outlook looks much weaker.
Most notably, rental car companies are struggling badly.
Hertz Global Holdings, Inc (NYSE:HTZ) stock is down roughly 70% just since July. Avis Budget Group Inc. (NASDAQ:CAR) shares have fallen 30% since February. Lower utilization — likely from business customer defections to ride-sharing companies like Uber and Lyft — has hurt.
But most notably, rental car companies are struggling with used car prices, with Hertz in particularly badly underestimating its depreciation. That could limit a key source of demand for Ford’s fleet sales – and provide further pressure going forward.
F Stock Isn’t Cheap Enough
With Ford stock at 7x earnings, some investors might argue that the stock is cheap enough — even considering these issues. But that’s a dangerous argument, particularly relative to F stock. The huge fixed-cost base required of automotive manufacturers — and potential labor inflation — mean even flat sales likely lead to declining earnings.
And from a longer-term perspective, there’s a key question: if Ford can’t grow earnings in an improving economy, what happens when the macro situation inevitably reverses? Add to those cyclical concerns the potential secular pressures from autonomous driving and/or ‘green’ development, and the 7x multiple for Ford stock makes a lot more sense.
Even if the long-term concerns are overstated — and Ford is making some progress in both electric vehicles and autonomous — there’s also little reason to jump in right now. The news relative to U.S. auto sales seems likely to get worse before it gets better. The same appears true for Ford stock.
As of this writing, Vince Martin had no positions in any securities mentioned.