Strictly on an earnings basis, Ford Motor Company (NYSE:F) looks almost impossibly cheap. Ford stock trades at roughly 7 times 2017 analyst consensus EPS estimates. That’s despite the fact that the average Wall Street analyst expects a modest rise in 2018 profits. Looking just at those two numbers, the fact that F stock trades just off a four-year low seems far too pessimistic.
Indeed, the stock looks like a classic contrarian play at the moment.
Earnings multiples are low. Sentiment remains negative; even short sellers are targeting Ford stock. The market is so focused on autonomous driving that Tesla Inc (NASDAQ:TSLA) — almost ludicrously — is valued higher than both Ford and General Motors Company (NYSE:GM) combined.
Certainly, there are real concerns here. But at some point, those concerns have to be priced in, right? But that’s not happening and there are several reasons why.
Ford Looks Behind in Autonomous Driving
Ford’s CEO change last month was driven, in part, by a desire to better emphasize autonomous driving development at the car maker.
New CEO Jim Hackett, formerly of Steelcase Inc. (NYSE:SCS) was the head of Ford’s Mobility division. Not only is Hackett taking the reigns for Ford overall, but the company plans to break out Mobility as a separate segment, to give more clarity on the sales and earnings (or losses) in the division.
The problem is that Ford already seems well behind in self-driving cars. With competition including Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) plus other major car manufacturers, Ford seems likely to struggle to narrow that gap. Honda Motor Co Ltd (ADR) (NYSE:HMC) already has said it will have automated freeway driving by 2020, and full self-driving by 2025.
Few observers think Ford is capable of matching those dates.
“Peak Auto” Is a Big Problem for Ford Stock
So-called “Peak Auto” — the notion that U.S. car sales have plateaued — creates a double-barreled longer-term impact on Ford earnings and Ford stock. Why? For one, autonomous driving itself may substantially limit overall car sales in the U.S. and worldwide. A fleet of self-driving cars would create a taxi service that would preclude the need for many drivers to own their own vehicles.
Second, Ford itself seems on a path where it will grab a much smaller share of that smaller market than it holds now, particularly in the U.S. It doesn’t look like a winner in autonomous driving. Its strength in pickup trucks and SUVs could further be eroded by either technological changes or environmental regulations.
With near-term “peak auto” concerns very real, there’s a material possibility that Ford’s earnings may have peaked for good. If that’s the case, long-term debt and pension obligations mean that F stock could still have substantially more downside, as cheap as the stock looks at the moment.
In the near-term, the fear that earnings have peaked will keep a lid on any potential rally in Ford shares.
There’s No Silver Bullet
The problem is that Ford doesn’t have an easy answer for the core concerns pressuring F stock.
It can, and will, work to improve its autonomous driving platform. But competition will be intense. It can’t create more demand overall for cars, or fix the fact that used car prices seem likely to come down sharply. The nature of the automobile business makes taking market share a multi-year process — if only because it takes that long to develop new models in order to meet customer demand.
And Ford can’t do the one thing that would most benefit its earnings: stop making smaller cars. It’s likely that all — and maybe more than that — of Ford’s profit comes from trucks and SUVs. But U.S. emission standards mean the auto maker must produce more fuel-efficient cars, even at a loss. While the Trump Administration has promised to review those standards, the odds of a complete reversal are slim to none.
The impression of Ford at the moment is of a company that is boxed in. Technological changes, one way or the other, are going to upend the automotive business over the next decade. Yet few investors trust Ford to be nimble enough to be a leader through those changes.
Until that changes, Ford stock is likely to stay stuck in neutral — at best. And there simply isn’t anything on the horizon that can create the investor confidence needed.
From that standpoint, the weakness in F stock makes plenty of sense.
As of this writing, Vince Martin has no positions in any securities mentioned.