Ford Motor Company (NYSE:F) stock currently trades at a 10-year low. It’s tempting to blame the decline on the recent broad market weakness. F stock, after all, has lost more than a third of its value just since February.
To be sure, the coronavirus-driven market rout is a factor. Automotive stocks are falling across the board.
As of this writing, Tesla (NASDAQ:TSLA) is down more than 30% just since mid-February. General Motors (NYSE:GM) stock has fallen off the table, dropping more than 20% in less than a month and touching a seven-year low. Toyota (NYSE:TM), Honda (NYSE:HMC), and Fiat Chrysler (NYSE:FCAU) are struggling as well.
But it’s not as if F stock was roaring before this selloff. Shares touched a nine-year low in late 2018. They were threatening those levels after fourth-quarter earnings last month. Ford stock has been heading in the wrong direction since 2014.
There were core issues underlying that long decline that have only been exacerbated by recent developments. I’ve generally been bullish on F stock below $10, as I believed it could tackle some of those issues. I still think the stock probably is a buy as it now trades below $6.
But Ford stock isn’t going to outperform its peers, or even necessarily rally, until Ford itself gives investors a core reason to step into the decline. The last five years show that a cheap valuation and a high dividend yield aren’t enough.
The Cyclical Problem
It’s tempting to argue that Ford stock isn’t much different at $6 in mid-March than it was at $8.31 after Q4 earnings in early February. That’s not necessarily the case.
Automakers, after all, are among the most cyclical businesses on Earth. And even if the coronavirus scare fades, the economic impact is going to linger. Morgan Stanley analyst Adam Jonas now estimates industry-wide U.S. auto sales will decline 9% in 2020. That comes amid long-running fears of “peak auto” as cars last longer and ride-hailing services like Uber (NYSE:UBER) lower urban demand.
At the very least, recession risk is rising. In that context, the declines in Ford stock and other automakers makes some sense — even if the coronavirus scare is a short-term blip.
Can F Stock Outperform?
Near-term issues aside, F stock has a long-term problem as well. There simply isn’t enough of a bull case here other than the stock is cheap and the dividend, now yielding almost 10%, is high.
That bull case has not worked in this market and still hasn’t. Energy and retail stocks were cheap in December, and yet still have been among the worst performers in this selloff. And it hasn’t worked for Ford stock either.
Here, too, the cyclical nature of the business is a factor. Cyclicals in theory should be cheap at the end of an economic cycle. There’s a reasonable debate as to whether the stock should be quite this cheap: F stock trades at less than six times the midpoint of 2020 adjusted earnings per share guidance. But it’s not as if F stock is going to trade at 20-times or even 12-times EPS at this point in the macro cycle.
To be sure, “too cheap” may be a reasonable bull case right now. If fears of the coronavirus and an ensuing recession fade, F stock likely catches a bid. But so does the market and the sector.
Again, other automakers too have fallen. GM stock is even cheaper looking to 2020, trading at 4.3 times the current consensus EPS estimate.
So, an investor can’t simply argue that this selloff is overdone, and therefore, Ford stock is a buy. She has to believe that Ford stock is a better buy than GM or TSLA or other auto names. Right now, that’s a tough case to make.
A Need to Differentiate
The problem on that front is that Ford simply hasn’t differentiated itself. It’s made some progress toward autonomous vehicles but there’s little evidence it’s a leader. It’s bringing hybrid and electric vehicles to the market but GM just last week unveiled a new battery and EV platform backed by some $20 billion in spending.
There’s a shorthand bull case for pretty much every other auto stock. Tesla is the leader in electric vehicles, and a company which bulls believe has decades of growth ahead. GM has a stock price that is cheap now, meaning its potential success in EV is not priced in.
Honda and Toyota have succeeded for decades through all sorts of environments. Foreign manufacturers like Volkswagen (OTCMKTS:VWAGY) and BMW (OTCMKTS:BMWYY) too seem at least near the front in electric vehicle development.
Where’s Ford? It’s now almost solely dependent on gas-guzzling trucks and SUVs after removing sedans from its lineup. It seems behind in electric and autonomous vehicles. The balance sheet is OK but pension liabilities are an issue.
Put another way, F stock is cheap but seems to have little else going for it. That hasn’t been enough for about six years now. It’s probably not enough going forward.
Ford needs to give investors a reason to get excited. Until it does, F stock may catch a bounce here or there. But it likely won’t outperform the market, and it almost certainly won’t outperform its industry.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.
