On the same day that up-and-coming auto company Tesla (NASDAQ:TSLA) reported record third-quarter production and delivery numbers that included a 100%-plus sequential surge in delivery volume, traditional auto giant Ford (NYSE:F) reported an 11% year-over-year drop in U.S. sales.
Coincidence? I think not. There is clearly a changing of the guard unfolding in the auto industry — and that changing of the guard is characterized by the saying “out with old, in with the new.” Ford and its gas-powered cars are the old. Tesla and its electric vehicles are the new. In three to five years, the auto industry will have a new giant (Tesla). During that stretch, Ford’s market share will drop — and the numbers won’t be that good.
This isn’t good news for Ford stock. Eroding market share, lower revenues and lower profits are a recipe for disaster. But one could argue that, below $10, Ford stock is already priced for this.
Five years ago, this was a $17 stock. Today, the Ford stock price is below $10. Moreover, five years ago, Ford stock was trading at 8-9 times forward earnings. Today, the stock trades at just 6x forward earnings.
In other words, the big decline in Ford stock price and valuation has already happened. What happens next?
Sideways trading. Normally, that isn’t good. But, Ford stock has a 6%-plus dividend yield, and sideways trading with a 6% yield is actually a solid value prop. As such, depending on what type of investor you are, Ford stock could be a good pick-up here.
Ford Faces Secular Headwinds
I’ve been bearish on Ford stock for a long time, because the company is facing three major secular headwinds which will adversely affect sales and profits for the foreseeable future. Those headwinds are:
- Higher interest rates are cooling off the auto market (higher rates mean higher borrowing costs, and that deters buying).
- The rise of the sharing economy and ride-sharing apps implies lower car ownership rates in the future (the more Uber is available everywhere, the less reason there is for me to own a car).
- The electric vehicle revolution implies bigger competition and lower market share for Ford (for all its greatness, Ford isn’t known as the go-to electric vehicle company and, consequently, the company will find itself with lower market share over the next several years as electric vehicles become the norm).
Ford’s September U.S. sales report underscores that these headwinds are only accelerating. Higher interest rates and lower car ownership rates are dragging down sales everywhere at Ford, with U.S. sales down 11% YOY. But, interestingly, truck and SUV sales were both down less than 10%. The big decline came in the cars category, where sales dropped 25%.
Why is that? I’d argue a big reason why is because of electric vehicles. In the SUV and trucks world, there are very few viable electric vehicle alternatives. But, in the general cars world, there are many viable electric vehicle alternatives — and the number of those alternatives is rapidly growing. As such, it looks like Ford is indeed ceding market share to electric vehicles where the EV competition is up to par.
These secular headwinds won’t cool off anytime soon. Tesla appears to have Model 3 production and delivery figured out. That could be a game-changer for the whole auto industry. Meanwhile, interest rates are only going higher, and Uber is only gaining in popularity. Thus, the narrative on Ford stock is doomed to remain negative for the foreseeable future.
Valuation Is Attractive
Although the narrative is troubled, Ford stock is priced as such. The stock trades at 6X forward earnings with a 6%-plus dividend. Those are distressed valuation levels. You don’t see forward multiples of 6 or 6%-plus yields unless the market expects a huge profit wipeout.
Will that happen at Ford?
I don’t think so. Given the aforementioned headwinds, I think Ford loses market share over the next several years. But Ford is a big company. It is an iconic brand. There is a big moat. There is a long track record of success. Millions of people globally love the cars and are lifetime customers. And the company has its own fleet of EVs.
Thus, while Ford will lose market share, its market share won’t get obliterated or head to zero. It will simply go down a few percentage points. In all likelihood, then, Ford revenues and profits will go down some, but not a ton.
The current valuation implies a profit wipeout. But the reality is mild profit compression. As a result, it looks like Ford stock has found a bottom. While it may not shoot higher due to depressed investor sentiment, it also shouldn’t go lower due to an already depressed valuation. “Not going lower” is a big win for a stock paying a 6% yield.
Bottom Line on F Stock
Ford stock is facing three huge headwinds which will depress earnings power over the next several years. But Ford is still a strong company with long-term staying power.
Below $10, that long-term staying power is being undervalued by the market. As such, single-digit territory looks like a good place to start accumulating Ford stock.
As of this writing, Luke Lango was long TSLA.
