Ford Motor Company (NYSE:F) is enjoying itself recently, but initial appearances can be deceiving. After engaging in choppy trading that is rather typical, Ford stock gained more than 8% since Aug. 18. Under most circumstances, such a move in a short period of time would be cause for celebration. Yet Ford is still down nearly 5% for the year.
Another relevant point to bring up is that the iconic automaker’s sudden bullish momentum isn’t occurring in a vacuum.
Domestic rival General Motors Company (NYSE:GM) accrued a near-identical haul in the markets over the same time frame. Of course, the key difference is that GM is up 11.3% year-to-date, whereas F stock is not.
Much to the disappointment of Ford Motors I’m sure, Japanese automakers also received a late-August, early-September lift. Toyota Motor Corp (ADR) (NYSE:TM), Nissan Motor Co Ltd (ADR) (OTCMKTS:NSANY), and Honda Motor Co Ltd (ADR) (NYSE:HMC) saw similar technical momentum over the last several days. Naturally, everyone is competing for the same pie, which poses problems for Ford stock.
As many of my InvestorPlace colleagues have pointed out, F stock has done nothing over the last several years. Technically speaking, its trailing five-year performance is 12.5%, which proves their point when you factor in inflation.
On a nearer-term basis, I’d argue that the situation is worse. Although fellow contributor Dana Blankenhorn remains bullish on Ford stock, even he admits the ride can be choppy. While I respect his arguments — because he’s usually way more right than wrong — I’ll take the opposite view.
China Can’t Help Ford Stock
I suppose Ford Motors is holding tough against current economic conditions. In Blankenhorn’s view, “not losing … is winning.” And to an extent, I agree. However, for me to truly believe in the contrarian opportunity, I need to have confidence in the underlying market. The huge, perhaps insurmountable problem for F stock is that the traditional automotive sector faces a paradigm shift.
China is the main reason why auto manufacturers received a boost in the markets. According to a report from the Associated Press, “China’s auto sales rose 4.1 percent in August from the same month a year earlier, driven by strong demand for SUVs.” That’s the good news. The bad news for Ford stock and its rivals is that China can’t carry the global automotive market.
If I may be blunt, I believe too many investors get hyped when talking about China. Yes, nearly 1.4 billion people call China home. That does not mean that all 1.4 billion can afford American imports.
Even when we’re specifically focusing on the Chinese middle class, that term is also fraught with misconception. Researchers at McKinsey & Company defined the Chinese middle class as “urban households that earn US$9,000 — US$34,000 a year.”
The obvious issue is the wide variance in the definition. But overlooking that, it’s a big ask for the lower middle class to pick up the slack in auto sales. For instance, a Ford Motors economy car MSRPs for more than what many Chinese workers make in a year. The price tag becomes increasingly onerous as you get into higher quality vehicles.
A Big Headwind for F Stock
Casting doubt onto the Chinese automotive market, I turn to the domestic sector. If Ford Motors can’t win in America, then I’m afraid F stock has a long road ahead of it. Here, it’s not that Ford can’t win; it’s that no one is winning.
Click to EnlargeMuch talk has centered on the concept of peak auto sales, and for good reason. So far this decade, lightweight car and truck sales average 15.2 million units per year. In the prior decade, sales averaged 15.8 million units, or a 3.8% decline. That’s quite startling for the fact that since the 1980s, unit sales consistently increased decade-over-decade.
Furthermore, our GDP has increased. We not only have more people, we have more people working. Supposedly, the current administration is going to make America and its economy great again. At a cursory glance, things appear on the up and up.
But the simple fact that Ford stock endured trouble maintaining a semblance of optimism concerns me. The problems of peak auto don’t appear to be going away any time soon. In addition, the China market isn’t the panacea that people assume it is.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.