For the first time in quite a while, Ford Motor Company (NYSE:F) stock is making a move. Ford stock hit its lowest levels in almost five years in August. Since then, however, F stock has gained 14%, hitting a six-month high in the process.
There is some good news here. August sales were better for both Ford and rivals, after a disastrous July for U.S. automakers. (Ford’s domestic sales dropped more than 7% in July; rival General Motors Company (NYSE:GM) saw a 15% decline.)
But I didn’t think the August sales report was a good enough reason to buy Ford stock, even if the market so far has disagreed. And, even with F stock looking cheap on a P/E basis, I still don’t think there’s enough reason to go long here.
The dividend is attractive, the stock looks cheap, and 2017 performance hasn’t been that bad. Near $12, however, that’s not enough.
Ford Stock and “Peak Auto”
The primary concern facing Ford, GM, and Fiat Chrysler Automobiles NV (NYSE:FCAU) is that it increasingly looks like U.S. auto sales have peaked and possibly for good. I wrote about this problem at length back in May, but it’s worth revisiting. In the near term, there already is a glut of used cars at U.S. dealerships. And as better cars last longer, demand cycles lengthen.
Ford has benefited over the past few years from replacing cars that aged out during the financial crisis and in many cases were driven longer than they would have been otherwise. That benefit is coming to an end. For now, pickups and SUVs are keeping sales and profits reasonably intact. But there, too, weakness is starting to show in industry-wide numbers. And an increase in gas prices could accelerate pressure in those categories, pushing consumers back to higher-mileage and less-profitable sedans and coupes.
Adding to that pressure is a somewhat undercovered problem: fleet sales. Rental car companies like Hertz Global Holdings, Inc (NYSE:HTZ) and Avis Budget Group Inc. (NASDAQ:CAR) have seen demand fall dramatically. Competition from ride-sharing companies Uber and Lyft appears to be a key problem for those operators. Weakness in rental cars not only hits fleet sales for Ford and its rivals, it also leads those agencies to sell off their existing fleet, adding to the pressure on used car prices. It’s a true double whammy.
Longer-term, meanwhile, increased ride-sharing usage and the development of self-driving cars should pressure demand as well. Long story short, there’s a very real possibility that Ford may never again sell as many cars as it did in 2016.
That’s Why F Stock Is Cheap
If that’s the case, then Ford’s earnings decline over the long term. And even at ~8x forward earnings or so, Ford stock isn’t cheap enough to price in that kind of pressure.
So to invest in F stock at current levels, an investor has to believe that the company has a path to restart earnings growth despite those pressures. And I simply don’t see it. A partnership with Lyft drew some headlines last week, but Ford looks behind in self-driving cars itself and Lyft is well behind Uber, Alphabet Inc (NASDAQ:GOOGL) unit Waymo, and other entrants.
Tesla Inc (NASDAQ:TSLA) has pole position in electric vehicles, with every other automaker vying for second place (at least for now). Ford doesn’t seem to have an edge in that space. New CEO James Hackett clearly is intent on making Ford more innovative, but it may be too late both for the company and for Ford stock.
What drives growth, then? Ford isn’t doing a great job in international markets. August sales declined 21% in the United Kingdom. Ford has vowed not to exit Europe, as GM did, but it continues to lose market share and face unit declines on the Continent.
What earnings Ford has now are coming predominantly from sales of SUVs and trucks in the Americas. The news everywhere else is rather grim. But the problem for Ford stock is that it looks like even that healthy U.S. business has peaked. If that’s the case, sales have nowhere to go but down. And that will likely be true for F stock as well.
As of this writing, Vince Martin has no positions in any securities mentioned.
