Ford (NYSE:F) stock is enjoying a brief rally as investors cheered the company’s restructuring plan. Shares of Ford and rival General Motors (NYSE:GM) are doing better than the automotive index.
However, like most corporate restructurings, Ford’s plan needs time. Unfortunately, time may be a commodity the automaker does not have. Even the most bullish economists acknowledge that a recession is coming. And the general consensus is that it will arrive in the next 12 to 24 months.
Therein lies the problem for F stock. Ford is betting its future on electric and autonomous vehicles. “Our future is rooted in electrification,” said Stuart Rowley, president of Ford of Europe. “We are electrifying across our portfolio, providing all of our customers with more accessible vehicle options that are fun to drive, have improved fuel economy and are better for our environment.”
It’s fair for investors to question if time is on Ford’s side. These technologies still require major investment to create the economies of scale that will make them available to a mass market.
There’s no question that the last 10 years have helped jump start this revolution. But the electric car market is not just about having cars for consumers to drive. It also means having an infrastructure that makes recharging convenient and affordable.
Cost Cutting Only Takes You So Far
Eliminating head count and shutting plants provides a quick fix to the balance sheet. Investors love it. But ultimately, it only takes you so far.
Recently, InvestorPlace contributors Will Ashworth and Mark Hake wrote about Ford’s potential inability to pay their 15-cent quarterly dividend. Hake points to the company canceling its special dividend as evidence they may not have enough free cash flow to keep up with their financial commitments to shareholders, including pension obligations and debt repayments.
Ashworth goes further and argues that Ford should consider only issuing a special dividend. By cutting the regular dividend they can put that free cash flow (currently about $5 billion) to work in other ways (e.g. a share buyback program). But if Ford stock no longer carried a quarterly dividend, how would that play with income investors?
Ultimately, for investors to believe in Ford and F stock, the company must increase revenue and profit by selling cars. In addition to plant closings and workforce reductions throughout 2020, Ford plans to continue evolving their product line. This includes reiterating their commitment to electric vehicles.
Consideration is Not Commitment
Right now, automakers are racing to meet regulators’ calls for more fuel-efficient (read: electric) vehicles. But in the words of Mark Wakefield, the head of Detroit-based automotive practice consultancy, AlixPartners, the pressure from regulators to shift to battery-based vehicles is creating a “profit desert” for auto manufacturers.
That’s because demand is not there. Many customers are saying they would consider buying an electric car. Yet battery-based vehicles accounted for just about 5% of the American new car market in 2018.
A recent survey conducted by Consumer Reports (CR) and the Union of Concerned Scientists (UCS) sampled 1,659 American adults who were considering purchasing or leasing a new or used vehicle within the next two years. According to the survey, 63% of prospective U.S. car buyers have some interest in EVs. This was broken down into three categories:
- 31% who said they would consider one for their next purchase
- 27% who would consider one down the road
- 5% who said they were definitely planning to buy or lease one for their next vehicle.
Call me skeptical. Firms use words like “consider” and “planning to” in surveys to give answers the nuance that they want. I’m not saying that either CR or UCS was deliberately attempting to skew the survey. Nevertheless, consideration is not the same as commitment.
All things being equal, consumers will consider many things. But electric cars and gas-powered vehicles are not equal.
Most electric cars still command a premium price and some EVs are not available in certain areas of the country. Plus, despite the growing infrastructure of nationwide, public charging stations, there is more work to do. This is particularly true in the area of the DC-fast chargers. Until that is resolved, EVs remain impractical for long-distance travel.
The Bottom Line for Ford Stock
The F stock price is up over 20% year-to-date. However, the stock is still trading at a large discount to other consumer discretionary stocks (less than 7 times estimated 2020 earnings).
The low valuation reflects the historical reality that automakers lose money during recessions. Ford is optimistic that their restructuring can help them remain profitable even if U.S. car sales fall to 11 or 12 million units (an approximately 35% drop from the 17 million cars sold in August of this year).
However, Moody’s does not seem to share Ford’s optimism. The rating agency downgraded Ford’s bonds to junk status. Moody’s cited “the considerable operating and market challenges facing Ford, and the weak earnings and cash generation likely as the company pursues a lengthy and costly restructuring plan.”
For many reasons, not all of which are their fault, Ford’s strategy seems to require a lot of hope. However, hope is not a strategy. I need to see more before investing in Ford stock.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.