When it comes to Ford Motor Company (NYSE:F) stock, nothing seems to work. Whether on a short-term or long-term basis, the shares have mostly lagged the markets. For the year so far, F stock is off about 12% and as for the past five years, it is up a miserable 11.2%.
But might there be a contrarian play with Ford stock? For the most part, this does seem tempting and there are certainly several positive factors.
The company has strong brands like Lincoln and the F series of trucks. What’s more, the cash flows continue to be robust. For the first half of this year, they came to about $3.3 billion.
Ford stock also sports an attractive dividend, which yields about 5.6%, and the valuation is at rock-bottom levels; the forward price-to-earnings multiple is under 7x!
OK then, should all this be enough? I don’t think so. The problem is that F stock is likely to face multiple headwinds. Here are three that stand out:
F Stock Problem No.1: Market Trends
The past seven years have seen strong gains in auto sales. But unfortunately, it looks like the trend has come to a cyclical peak. For the first seven months of this year, the unit volume has declined nearly 3%. As should be no surprise, the industry is engaging in lots of promotional activity, such as with zero-interest financing.
Regarding Ford, the company’s management believes that the deceleration is not temporary. It’s also important to keep in mind that the U.S. is not the only market that is feeling the pressures. Note that there is softness in Europe and Asia, which are both key for Ford.
As a result, during the latest earnings report, F lowered its 2017 guidance. The company is now forecasting adjusted earnings of $7.8 billion to $8.7 billion, which compares to the prior guidance of $9 billion. To put things in perspective, the profits for last year came to about $10.4 billion.
F Stock Problem No.2: Innovation
The pace of change in the auto industry has been breathtaking. With the continued advances of AI (Artificial Intelligence) and machine learning, autonomous cars will likely become common within the next decade. In fact, this megatrend has already bolstered the fortunes of tech operators like Tesla Inc (NASDAQ:TSLA), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Nvidia Corporation (NASDAQ:NVDA).
At the same time, the transportation industry is seeing tremendous innovation with new ownership models. These involve ride-hailing startups like Uber and Lyft. In light of this, there will likely be less demand for cars. But the pressure on traditional car rental players, like Hertz Global Holdings, Inc (NYSE:HTZ) and Avis Budget Group Inc. (NASDAQ:CAR), could weigh on Ford as there will be fewer fleet sales.
The problem for F stock is that the company has been playing catch up. And the recent moves have been far from inspiring. After all, F has partnered with BlackBerry Ltd (NASDAQ:BBRY), which continues to struggle.
It’s true that the company has hired a new CEO, Jim Hackett. Prior to joining Ford, he led the turnaround at Steelcase Inc. (NYSE:SCS). In other words, Jim could provide an outsider’s perspective, which is likely to be crucial.
But the transformation process will take time — and besides, Ford will need to undergo quite a bit of cultural change.
F Stock Problem No.3: Scale
The auto industry has always been about scale. Let’s face it, customers want quality cars at affordable prices. But there is also the need to invest substantial amounts in cutting-edge technologies. So by achieving significant economies of scale, a company can spread these costs.
Given this, what levels does an automaker need? Well, according Fiat SpA (ADR) (OTCMKTS:FIATY) CEO Sergio Marchionne, an automaker may need to reach levels of 15 million cars sold annually to get to the right levels. No doubt, this is a very high bar.
However, as for Ford, it produces about 6.7 million cars per year, which really puts it at a disadvantage. If anything, perhaps the best strategy right now is to look for a strategic partner or even to sell out. Remaining as an independent player among tough global competitors — such as Volkswagen Group and Toyota Motor Corp (ADR) (NYSE:TM) — is likely to get tougher and tougher.
Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.