You would be forgiven for thinking that the situation is looking a little brighter for American automaker Ford (NYSE:F). Since closing at decade-long low of $4.01 on Monday, Ford stock has seen big gains.
Its close of $5.39 on Wednesday represents a 34% improvement. The company will get a lifeline from the coronavirus relief package, and when life returns to normal it has hotly anticipated vehicles like the Mustang Mach-E in the pipeline. However, on Wednesday Ford had its shares downgraded to junk status.
Ford Stock Downgraded
Ford started off 2020 with a C-suite shakeup and disappointment over a turnaround that was taking much longer than expected. Things rapidly worsened with the coronavirus pandemic. Ford factories shut down and expect to stay that way until into April.
March sales are projected to be down as much as 40%. In addition, Ford’s credit arm has been extending payment delays to avoid current customers from defaulting on car loans.
When the market crashed, F stock lost as much as 50% before news of a $2 trillion economic stimulus package saw stocks begin to bounce back. However, auto makers are expected to receive only loans. Last week, the company borrowed $15.4 billion, so any government credit would be on top of that.
Low gas prices might be good for sales of Ford vehicles — which are heavily weighted toward pickups and SUVs — but that doesn’t help when consumers are staying away from showrooms and worrying about their finances.
As a result, on Wednesday, Standard & Poor’s Financial Services announced it was downgrading Ford’s credit rating from BBB- to BB+, junk status. In addition, S&P noted that a downturn in light vehicle sales and expected cash burn over the next 90 days means a 50% chance that rating could be lowered further.
What About the Bronco, Electric F-150 and Mustang Mach-E?
Ford has been noticeably absent from lists of best electric vehicles. That’s because unlike competitor General Motors (NYSE:GM), Ford took a cautious approach to EVs. After dabbling in short-range plug in EVs like the 2011 Focus Electric, Ford backed off and instead offered hybrid choices across its lineup.
That’s set to change shortly. The company is currently taking reservations for the the Mustang Mach-E. The mid-sized SUV has a starting price of under $44,000 (not including any government credits), and a 300 mile range. Ford is expecting to start deliveries of the Mustang Mach-E in spring 2021.
Also expected in 2021 is the launch of an all-electric version of Ford’s F-150 pickup truck. According to professor M. Berk Talay, Associate Professor of Marketing at University of Massachusetts Lowell, the F-150 generates roughly 90% of Ford’s global profits. With Tesla (NASDAQ:TSLA) targeting late 2021 for the release of its Cybertruck, the electric F-150 will be a critical release for Ford.
In addition, one of the most highly anticipated new vehicle reveals of the year is fast approaching. The all-new Ford Bronco will bring back a classic nameplate in an attempt to capture more of the hot crossover SUV market. Ford is expected to reveal the Bronco this spring, with plans to release it in 2021.
The problem with all these big releases is that Ford will be releasing them next year (the electric F-150 may not actually go on sale until 2022), and all appear to be relatively premium vehicles. If the economy goes into recession in the coronavirus aftermath, they could land with a thud as consumers hold off on big ticket purchases.
Bottom Line on Ford Stock
Investment analysts feel that a Ford investment at this point is risky. Yes, F stock is still near lows not seen since 2009. Even with its big gains this week, it’s still down 41% since the coronavirus crisis first kicked off the market meltdown. However, Ford stock is rated as a consensus hold. Analysts’ $6.89 median 12-month target price shows little confidence the stock will return to pre-coronavirus levels any time soon.
As an auto maker, Ford will be trying to sell big-ticket products at a time when many workers will be feeling the financial pinch from weeks or longer of layoffs. There’s a strong likelihood that many will be out of work altogether. At the same time, Ford will be feeling the impact of the financial relief provided to customers to help preventing them from defaulting on their car loans. Ford’s large-scale borrowing and credit downgrade is going to have a lasting impact on the company’s finances.
It may look tempting at $5.39, especially with the launch of the new Bronco, electric F-150 and Mustang Mach-E approaching, but now is probably not the time for a bet on Ford stock.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
