Automotive manufacturer Ford (NYSE:F) is set to announce third-quarter earnings results on Wednesday. Investors will be anxious to see what the results show, but they will also be interested in hearing what the company has to say about its overall outlook and ultimately what that could mean for the future of Ford stock.
For those who might be out of the loop, Ford stock has been trending lower for the last five years and in 2018 we have seen the stock lose another 26%. The selling has really accelerated since the early part of June and the stock dropped below $9 for the first time since December 2012. (The sharp dip in August 2015 appears to be a bad tick.)
F stock is oversold based on the weekly stochastic readings and the 10-week RSI. The stochastic readings have been in oversold territory since July and the RSI has spent a great deal of time in oversold territory as well, so this development isn’t exactly a reason to think F stock is bound to rally.
Poor Fundamentals Are the Main Reason for the Fall in F Stock
It isn’t always the case, but in the case of Ford, the main reason for the F stock price dropping over the last few years is a poor fundamental performance. The company has struggled to grow earnings and sales have been declining.
Over the last three years, Ford earnings have declined by an average of 4% per year. The second quarter saw Ford’s earnings drop by 52% compared to the same period a year earlier. Analysts expect earnings to decline by a total of 26% for the fiscal year.
Ford’s sales have been declining as well. In the second quarter, sales fell by 2% and the company recently announced that September sales were 11% below the previous year. The company had been making gains in the Chinese market, but the trade war has changed that and Ford’s sales fell by 43% in September. That made three straight months where Ford’s sales have fallen in China.
These recent developments have caused analysts to lower their Ford earnings estimates for the third quarter. The consensus estimate is for earnings of 29 cents per share and that estimate has been ratcheted down from 32 cents per share only 30 days ago. The estimate for revenue is $33.63 billion.
Falling sales and declining earnings are always a concern, but they are even more of a concern in Ford’s case due to its tremendous debt load. F has $152.84 billion in total debt — long term and short term.
The company also operates with low margins at this time. The profit margin is 5.4% and the operating margin is at 3.48%. The return on equity isn’t bad at 19.7%, but the return on assets is low at 1.37%.
Ford Stock: Sentiment Indicators Are Mixed
The sentiment toward Ford stock is mixed heading in to the earnings report. The short interest ratio is a little low, which means slight optimism — analysts are pretty pessimistic and option traders are neutral.
Specifically, the short interest ratio is at 2.45, but with the Ford stock price under $10, it becomes a little more difficult to short. Given the fall in the stock price since the beginning of the year, there has likely been some profit taking from short sellers that were in early.
Meanwhile, there are 24 analysts following F stock and only four of them rate the stock as a “buy”. On the other hand, there are 18 “hold” ratings and two “sell” ratings. Given the fundamentals and the falling F stock price, these totals are in line with what I would expect.
The current put/call ratio is at 0.859 and that is relatively neutral, but leaning slightly toward the pessimistic level of 1.0 or higher. The ratio is up from where it was on July 25, which is when Ford announced earnings for the second quarter.
Ford Earnings Expectations
Value investors might find F stock somewhat appealing because its P/E ratio is below six; the dividend is also attractive at 6.85%. But there is some concern about the company being able to continue paying such a high dividend if earnings and sales continue to decline.
If you are a long-term investor with a lot of patience and an appetite for a high yield with an elevated risk level, Ford stock might appeal to you. But it is going to take a lot of patience. Ford has struggled with its model lineup and recently changed advertising agencies. They are trying to turn things around, but turnarounds like this take time.
Personally, I don’t find F stock appealing as an investment. I am more interested in growth investments and I am not focused on dividend investing at this point in my life. I also tend to be focused on faster turnarounds. My typical investment timeframe is less than a year and I don’t see F stock producing a huge gain in 2019.
The one thing that could change Ford’s trajectory in the near term is a new trade deal with China. If the U.S. and China come to terms and eliminate all of the tariffs that have been implemented this year, Ford’s sales could start to move higher again and the impact would likely be felt immediately.
But until a trade deal is reached, I am staying away from F stock.
As of this writing, Rick Pendergraft did not hold a position in any of the aforementioned securities.