Over the past few trading days, shares of U.S. automaker Ford (NYSE:F) have fallen off a cliff to decade lows on fears that the coronavirus outbreak in China will materially slow demand for the company’s vehicles, especially in China. Month-to-date, F stock is down about 13%.
These fears are legitimate. China’s economy has come to a screeching halt. Consumers aren’t even leaving their homes, let alone going and buying new cars. China car sales dropped 92% in the first half of February.
Against that backdrop, Ford isn’t selling many cars in China, so some weakness in Ford stock from the coronavirus outbreak is warranted.
But this much weakness — shares down 13% in a few weeks to decade lows — isn’t warranted for a few reasons.
First, China is a small part of Ford’s global business. A big hit there won’t translate into a big hit on Ford’s overall financials. Second, the coronavirus outbreak in China appears to have peaked and is now de-escalating. By the second quarter of 2020, the auto market in China should rebound. Third, demand trends elsewhere remain favorable and will remain favorable for the foreseeable future, supported by low rates, strong labor conditions, and electrification of Ford’s automobile line-up.
Overall, then, coronavirus fears are creating an opportunity in Ford stock. Over the new few months, this stock will likely rebound back to $10.
Coronavirus Fears Are Overblown
The coronavirus is a big, scary, and volatile thing. But, with respect to Ford, the adverse impacts are being overstated.
Ford sold over 1.3 million vehicles in the fourth quarter of 2019. Only 159,000 of those vehicles were sold in China. For perspective, about 681,000 cars were sold in North America, and 346,000 in Europe.
Even further, China only accounted for about $1 billion in revenue for Ford in the fourth quarter, which amounts to a measly 2.5% of the company’s revenue. The Chinese segment also isn’t profitable, so it’s not a profit driver for Ford.
In other words, China is a very small, unprofitable part of Ford’s global business. Any negative and adverse impacts in China, won’t have a significant ripple effect across Ford’s global business.
It’s also worth noting that the coronavirus appears to have peaked in China. New cases have come in at less than 1,000 per day for the past several days, marking a significant deceleration from earlier February, when China was reporting several thousand new cases every day.
Consequently, it increasingly appears that within the next few months, warmer weather and quarantining measures will put the outbreak to bed. China’s economy will go through a v-shaped recovery, and the auto market will come roaring back to life in the second and third quarters.
Big picture: the coronavirus impact on Ford will be both small and short-lived.
Ford Stock Will Bounce Back
Once coronavirus fears fade, Ford stock will come roaring back in a big way. Why? Because this stock is simply too cheap for its own good and has some major growth catalysts on the horizon.
Just take a look at the valuation on Ford. Shares trade at 7.4-times forward earnings. The stock has a 7.8% dividend yield. When you have a stock that has a forward multiple equal to its dividend yield — and both are up around 8 — you have a dirt-cheap stock that’s priced for catastrophe.
But catastrophe won’t happen here.
Instead, over the new few months, coronavirus fears will fade. China’s auto demand will come roaring back, supported by continued fiscal stimulus from the People’s Bank of China, easing U.S.-China trade tensions, and pent-up consumer demand (remember, 99.99% of Chinese consumers are healthy and have been cooped up in their houses for the past month).
At the same time, Ford’s demand trends in Europe and North America will materially improve over the next few months, too, thanks to low rates, strong labor conditions, and electrification of Ford’s automobile line-up.
The last factor there is the most important, because Ford has finally woken up to the electric vehicle trend, and is launching multiple new electric vehicles over the next few years. These new electric vehicles will help recharge demand for Ford vehicles in the company’s key North America and Europe markets, where electric vehicle demand is rapidly rising.
Net net, healthy growth will come back into the picture for Ford by mid-2020, and when it does, it will converge on a hugely discounted valuation to spark big gains in Ford stock.
Bottom Line on F Stock
Coronavirus fears, while legitimate, are overstated with respect to Ford. The stock is now dirt cheap, with a huge yield, and trades at a decade-low price tag. But, better days are ahead, and when those better days come, Ford stock will jump back to $10.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by TipRanks, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
