Ford Motor Company (F) Stock Still Isn’t Worth Chasing

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Ford Motor Company (NYSE:F) just can’t get off the mat. Ford stock is down nearly 11% year-to-date, despite a strong bull market that should be good for a cyclical like F.

Ford Motor Company (F) Stock Still Isn't Worth Chasing

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In fact, Ford stock is at risk of returning to the single-digits for the first time since 2012. And in a sense, it almost doesn’t matter what the company does.

Investors appear increasingly convinced that self-driving cars are on the way — and that Ford won’t be a part of that future. While stocks like Tesla Inc (NASDAQ:TSLA) and Nvidia Corporation (NASDAQ:NVDA) soar on automotive optimism, Ford stock and that of peer General Motors Company (NYSE:GM) trade at single-digit earnings multiples.

I simply don’t see that changing any time soon. In the meantime, there is real risk to Ford stock. Near-term “peak auto” concerns only add to its problems. Earnings are declining, and they should continue to do so.

That implies more potential downside for F stock.

Even An Earnings Beat Can’t Save Ford Stock

I can see why Ford stock holders would be frustrated after the company’s second-quarter earnings report. Ford crushed consensus estimates and raised full-year guidance. Both sales and earnings-per-share increased year-over-year, seemingly contradicting the “earnings are declining” bear case toward Ford stock. And yet F stock somehow declined almost 2% on the news.

There’s a decent reason for the skepticism, however. Ford benefited from a lower-than-expected effective tax rate; adjusted pre-tax profit did decline year-over-year. Commodity costs helped margins, but those margins still declined, and those costs are going to increase. Ford’s credit division contributed its best profit since 2011, but concerns about increasing subprime auto loan defaults mean that business’s performance may reverse.

Ford’s Q2 simply wasn’t as good as headline numbers suggested. And that’s why investors sold off F stock. If anything, the quarter re-affirmed fears that earnings are going to trend down for a few more years, given the recent peak in new car sales and an apparent glut in used car inventories. And those fears were amplified by a tough July sales report.

Fleet Sales and F Stock

Any hopes of a post-earnings rebound were undercut by Ford’s July sales report. U.S. sales declined 7.5% year-over-year, highlighted by a significant 26.4% drop in fleet sales.

Ford’s lower fleet sales have been an underappreciated part of the weakness in F stock, as I wrote last month. Hertz Global Holdings, Inc (NYSE:HTZ) and Avis Budget Group Inc. (NASDAQ:CAR) are struggling badly with competition from ride-sharing services Uber and Lyft. Those struggles are leading both companies to pull back on fleet buying, and that’s a big headwind for Ford.

In July, for instance, fleet unit volume still accounted for roughly 20% of total unit sales. And while gross margins for those sales likely are lower, pulling thousands of unit sales off the existing fixed-cost base has a significant impact on operating margins, which declined on an adjusted basis in Q2.

That pressure is a harbinger of what self-driving cars could do to manufacturers like Ford — if they can get a piece of the action themselves. In theory, autonomous driving should drastically reduce demand, as many people — not just business travelers — can use ride-sharing services instead of owning a vehicle. That’s the concern that long-term investors see in Ford stock. And it’s not going away.

Ford Just Isn’t A Buy

F stock is cheap. But it’s cheap for good reason. There are myriad pressures in both the short-term and long-term. And Ford simply doesn’t seem all that well-positioned to battle those pressures. New CEO Jim Hackett reportedly is in the midst of a 100-day review of the company, which may result in significant changes. But I’m not sure Hackett is left with many good options.

Ford looks behind in electric vehicles, and behind in autonomous. And competitors like Tesla and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), let alone European manufacturers, won’t be willing to let it catch up.

A 5.5% dividend yield and a 7x forward price-to-earnings ratio might make F stock look attractive. But it’s not. With earnings exceedingly likely to decline going forward, Ford stock remains a value trap.

As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/ford-motor-company-f-stock-isnt-worth-chasing/.

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