Let’s face it: investing in auto companies has not been an easy endeavor for quite some time. Ford (NYSE:F) is no exception, as Ford stock is down over the last one-, three-, and five-years. In fact, Ford stock is up just 26% over the last ten years.
But it’s not just Ford that’s been struggling. General Motors (NYSE:GM) stock has had issues, while Daimler (OTCMKTS:DDAIF) has been under pressure, too. Toyota (NYSE:TM) stock has mostly tread water over the last five years, up just 14%.
Heck, even Tesla (NASDAQ:TSLA) is up just 1% over the last five years.
The auto space is not an easy — or quite frankly, an enticing — investment zone. There are times when buying auto stocks on weakness looks attractive, when Ford and GM’s dividend is too enticing to pass up. But aside from Ferrari (NYSE:RACE), this space remains plagued by lackluster results.
Valuing Ford Stock
Part of the problem is that too many investors do the bare minimum when they look at auto stocks. That is, they see the dividend yield of F stock, which stands at 6.75% and its price-earnings ratio of seven and think, “wow, what a good buy!”
That’s not the case, though.
Just because a stock has an attractive yield and a low P/E ratio, doesn’t mean it’s an automatic buy. There’s a reason Ford stock price hasn’t gone anywhere in a decade and is down 40% over the last five years.
Sure, Ford and GM are very profitable during economic upturns. But investors have not been willing to pay a premium — or even the market’s average multiple — sue to concerns that auto sales have nearly peaked. Interestingly, auto sales haven’t reached a definite peak, followed by the big decline everyone is worried about.
Largely, auto sales have plateaued as GM, F and others continue to churn out profits, but show little in the way of growth. That’s emphasized by analysts’ estimates, which call, on average, for Ford’s sales to drop 2.2% this year and slightly less than 1% in 2020. On the earnings front, estimates call for a 1.5% decline this year before an 8.6% bounce in 2020.
This lack of growth doesn’t give investors any extra incentive to buy a great deal of Ford stock.
Adding to the problems facing Ford stock, Ford’s balance sheet looks bloated beyond belief. Ford Credit is responsible for the bulk of its debt. But worth mentioning is that Ford Credit is quite profitable.
However, my biggest issue with Ford stock at this point is the company’s margins. While its gross margins continue to trend higher (its trailing gross margins stand at 17.9%), its operating margins, now at 1.75%, continue to trend lower,. All it would take is one big expense or a few quarters of economic contraction for Ford’s profitability to be slammed.
Trading Ford Stock
It helps that Ford is going to focus on SUVs and trucks, given that they are more profitable than passenger vehicles. But automakers are slow-moving aircraft carriers, not zippy speedboats on an inland lake. Ford’s moves will take time to bear fruit, and, as indicated on the chart above, investors aren’t going to pay a premium for F stock in the meantime.
Following Ford’s post-earnings fall in July, F stock price has been spending most of its time rangebound between $9 on the downside and $9.60 on the upside. The 200-day moving average had been lifting the stock, while the 50-day moving average was acting as resistance.
On Tuesday, the 200-day moving average failed and on Wednesday, the selling of Ford stock accelerated. That puts the August low of $8.70 on watch. If F stock price closes below that mark and fails to reclaim it, further selling of Ford stock will probably occur.
The 61.8% retracement of Ford stock for the one-year range is at $8.08. If F stock price falls below that level, I would look for support between the 78.6% retracement at $8.08 and the $7.80 mark. If the shares fall below that, the 2019 lows near $7.20 are on the table.
While F stock price is about 16% away from hitting new lows, I think it can happen. The shares don’t have momentum at their back and if the stock markets come under pressure, Ford stock will probably also be hit.