Gone are the days when automotive giants, such as Ford (NYSE:F) and General Motors (NYSE:GM), were centerpieces of major domestic benchmarks like the Dow Jones Industrial Average. Fors stock doesn’t have the status it did in the 20th century.
Today, General Motors and Ford stock have a combined market value of about $87 billion. Multiply that number by 10 and you get one Amazon.com (NASDAQ:AMZN).
However, automobile makers remain important tells regarding the health of the broader economy and although Ford stock isn’t the bellwether it used to be, it can still be an accurate gauge of consumer sentiment and investors’ willingness to take on risk.
A Closer Look at Ford
Right now, the status of Ford as a bellwether on anything should be concerning because the shares labor nearly 16% below their 52-week high and recent sales news from rivals does not augur well for Ford.
On Oct. 1, Japanese rivals Honda, Nissan and Toyota all reported double-digit declines in September sales. Ford doesn’t report monthly sales figures, but if its rivals September showings are accurate indicators when Ford releases third-quarter results, the picture could be unappealing.
Last month, new automobile sales in the U.S. slide to 16.8 million from 17 million in August and 17.3 million in September 2018, according to J.D. Power and LMC Automotive.
The release of that data coincided with Buckingham Research reiterating a “neutral” rating on Ford stock while reducing its price target on the shares to $8 from $9. That represents a significant downside from Ford’s Oct. 1 close of $8.90.
Looking Ahead
The near-term outlook for Ford stock is murky at best. That much is confirmed by the aforementioned lethargic data points and the company’s own, unimpressive 2019 guidance. Following its second-quarter earnings report in July, Ford said it expects to earn $1.20 to a $1.35 a share this year, well below the consensus estimate of $1.39 at that time.
Looking farther out, there’s a more compelling case to consider Ford stock.
“Overall, the global automotive industry is in better shape than it was five years ago, especially in the US, where profits and sales have recovered following the recent economic crisis, and in China, where growth remains strong,” according to a McKinsey study. “This progress will likely continue. By 2020, global profits for automotive OEMs are expected to rise by almost 50 percent.”
Ford’s ability to evolve with its industry and not be challenged by that evolution is integral to the long-term thesis for Ford stock. Simply put, this isn’t your grandfather’s auto industry. Heck, it’s not even your father’s.
According to Evangelos Simoudis, founder and managing director at Synapse Partners, and his coauthor Stephen Zoepf, executive director of the Center for Automotive Research at Stanford (CARS).:
“After decades of stability, the automotive value chain is being challenged by a storm of social problems to which transportation is a contributing factor, including rising urban congestion, road fatalities and climate change…Simultaneously, the industry is being pulled in new directions by promising technological developments: electrification, automation, artificial intelligence and high-speed wireless connectivity. Leaders of automotive companies are now contemplating how to migrate from their current business model.”
Bottom Line on Ford Stock
Obviously, Ford is not a luxury car maker. It operates in the mass market, meaning it takes volume to move the needle. There was a time when the company relied heavily on incentives to move product.
“We remain optimistic about Ford’s long-term prospects because the company now makes cars people actually want to own instead of vehicles that are purchased only because of heavy incentives,” said Morningstar in a recent note. “Ford’s challenge is to increase share profitably while also elevating Lincoln into a global luxury brand.”
If the company can keep operating margins in the 5% or increase that number while retaining or boosting market share in the North American and Chinese markets, For stock could be a long-term winner.
At less than 6x forward earnings, the shares are dirt cheap and imply a multiple befitting darker economic scenarios than are currently at play.
As of this writing, Todd Shriber does not own any of the aforementioned securities.
