I flipped over to the ‘buy’ camp on Ford (NYSE:F) stock this year and probably a bit too early. F stock would go on to touch a six-year low, and even after a brief rally the Ford stock price is down 25% so far in 2018.
There’s no shortage of worries here. The “peak auto” concern I highlighted eighteen months ago still looms. Tariffs have led to rising input costs and potentially could hurt the company’s already-struggling businesses overseas.
Alphabet (NASDAQ:GOOGL,GOOG) unit Waymo, Tesla (NASDAQ:TSLA), and even rival General Motors (NYSE:GM) all seem potentially ahead of Ford in electric and self-driving vehicles. It is not particularly difficult to build a “value trap” case when it comes to F stock.
All that said, I still think the Ford stock price has a path to move into the double-digits. GM announced restructuring efforts of its own this week, and Ford likely will follow. International concerns are real, but Ford has struggled beyond the U.S. for some time anyhow.
Ford’s decision to abandon sedans in the U.S. does run some risk, particularly if gas prices spike again, but it should save billions in costs and capital and potentially drive near-term earnings growth.
It’s not a perfect bull case, by any means. But even as the noise level surrounding F stock seems to rise, the bull case still looks intact.
Profit Growth Should Boost the Ford Stock Price
I wrote in early October that September monthly sales from Ford seemed to strongly support the bull case. October numbers weren’t quite as good but investors still can see reason for optimism.
The numbers support the strategy to focus on SUVs and trucks, particularly in the U.S. Unit sales overall declined 3.9% year-over-year. But pricing rose an equivalent amount. SUV unit sales were up 6%+, helping to offset a 17% decline in passenger car sales.
In short, Ford is selling more of the vehicles it wants to and less of the ones it doesn’t. Vans are up. SUVs are up. And even with truck sales declining almost 5%, pricing is rising, including record levels for the F-150 series.
It’s been decades since Ford could compete with imports from Honda (NYSE:HMC) and Toyota (NYSE:TM) – and at certain point, the company isn’t going to catch up. From that standpoint, the strategy shift here makes some sense. In passenger cars, Ford had to fish or cut bait, and it’s made its choice.
The Risks to F Stock
The question is whether that choice was a proactive decision to narrow the company’s focus or a move to make the best of a bad situation. And it’s worth remembering that while the Ford stock price seems cheap, there are real risks here.
This remains a leveraged, cyclical company with a reasonable amount of remaining pension expense. Ford did avoid bankruptcy in the financial crisis; but largely due to a well-timed debt repackaging, not necessarily a superior business model to that of GM or Chrysler (now part of Fiat Chrysler (NYSE:FCAU)).
And there’s still a scenario in which the Ford stock price heads to zero. A repeat of 2008-09 where demand falls and gas prices rise isn’t off the table. The move to higher-priced vehicles actually seems to increase Ford’s vulnerability in that situation.
Any potential consumer trading down, whether due to upfront cost or higher gas prices, from Ford will have to go to another manufacturer to do so.
Worst-case scenario aside, it does seem like risks are rising. President Donald Trump already has threatened GM regarding its decision to shut down plants which may make Ford pause about any similar cost-cutting measures.
Steel and aluminum costs are rising. Younger consumers who are more environmentally conscious may look to electric vehicles, which is an area where Ford appears to be well behind.
Indeed, the Ford stock price itself tells a story. F stock is on its way to a sixth straight year of declines – in an economy that has grown nicely over that stretch. The simple question, then is: what happens when that economy inevitably reverses?
Ford Can Muddle Through
The answer might be that Ford can get by and do enough to support a barely 7x multiple to the midpoint of 2018 EPS guidance. Trump’s threats have shaken GM stock but he’s made them before with little apparent impact. Electric vehicle adoption, even with Tesla’s growth, remains minimal.
I’m still firmly in the camp that believes autonomous driving is much further out than proponents suggest, given the myriad issues surrounding liability, privacy, and customer preference that must be addressed even once the technology is available (which itself seems a long way off). And Ford has partnered with Walmart (NYSE:WMT) and Postmates for self-driving home delivery once that opportunity opens up.
The bull case here is that Ford can stay profitable long enough to at least return shareholder capital. From there, there’s hope the company can compete in whatever the “new normal” turns out to be in the automotive industry. And below $10, I still think that bull case is reasonably intact.
The balance sheet actually is in good shape at this point, even accounting for pension expense and the credit risk taken on by Ford Credit. A narrower focus will let Ford play to its strengths in the U.S.
International businesses continue to struggle, but at some point Ford either will show improvement or let those go and free up capital to invest elsewhere (or return to shareholders).
The worst-case scenario here remains a zero. But the most likely but still-negative scenario suggests that Ford is something close to “dead money” with a nearly 7% dividend yield. That’s good enough, and good enough to ignore the noise around the stock at the moment.
As of this writing, Vince Martin has a bearish out-of-the-money options position in TSLA. He has no positions in any other securities mentioned.