No risky asset class or sector has been spared from a deep correction as the coronavirus from China spreads globally. Ford (NYSE:F) stock traded in the range of $8 to $10 for almost a year. At that point, the shares seemed to be trading in a consolidation zone and poised to move higher. However, the global coronavirus pandemic has changed the picture, and the stock has plunged by 45% since Feb. 4.
Even after the massive correction, I am cautiously optimistic. It makes sense to buy a relatively small amount of the stock. However, there are too many uncertainties to be bullish on the name, even at its current valuation.
For FY2020, Ford expects earnings per share of at least 94 cents. At its current level of $5, F stock is trading at a price-earnings ratio of slightly over five. That is the company’s lowest valuation in a decade. Therefore, purely from a valuation perspective, the stock is attractive.
Renewed expansionary monetary policy by the Federal Reserve is another positive amidst the gloom. Further, lower borrowing costs can be positive for the automobile sector. The markets might also be factoring in additional stimulus that targets certain sectors of the economy.
The Outlook of the Automobile Sector Is Uncertain
The spread of COVID-19 globally is likely to have a significant impact on the broad economy and the automobile sector. Estimates point to a potential negative impact of $2.3 trillion on the global economy.
As far as the automobile sector is concerned, Moody’s expects global vehicle sales to decline by 2.5% in 2020. However, that is based on the assumption that the virus can be contained by the end of the first quarter.
Morgan Stanley analyst Adam Jonas expects U.S. auto sales to decline by 9% in FY20. Before the outbreak, Ford was generating robust cash flows from healthy sales of pick-up trucks and vans in the U.S.
In China, auto sales are expected to decline by 5% for the year. It is worth noting that Ford had ambitious plans to launch 30 new models in China over the next three years. Its growth is likely to be impacted beyond the current year because launches of new models will have to be postponed.
Ford was also performing well in the commercial vehicle segment in Europe. The European car market is likely to shrink by 2% in FY20. However, the projections don’t factor in the recent, rapid spread of COVID-19 .
Amidst these gloomy projections, it’s likely that Ford will revise its EPS guidance for FY20. Even if F stock does not drop below its current levels, it’s unlikely that it will rise meaningfully.
Ford Won’t Have Credit Issues
It’s worth mentioning that Ford needed a bailout during the financial crisis of 2008-09. However, Ford is currently well-positioned to navigate an extended slowdown.
From a liquidity perspective, Ford reported that it had $22.3 billion of cash as of December 2019. For the same period, the company’s total liquidity buffer was $35 billion.
Further, Ford reported adjusted free cash flow of $2.8 billion in 2019. Even if its sales and cash flows drop, Ford’s credit position is likely to remain strong through the year.
Meanwhile, assessing the likely impact of COVID-19, a research article from Harvard Business Review indicates that “V-shapes monopolize the empirical landscape of prior shocks, including epidemics such as SARS, the 1968 H3N2 (“Hong Kong”) flu, 1958 H2N2 (“Asian”) flu, and 1918 Spanish flu.”
If there is indeed a V-shaped recovery in the second half of FY20, Ford will emerge from the crisis with limited impact on its balance sheet.
My Final Thoughts on F Stock
Ford is seemingly inexpensive at a forward P/E of around five. However, if expectations for its EPS are revised downwards, its valuation can change significantly.
Just as an example, a potential downward revision of the company’s EPS to 50 cents would imply a forward P/E of just over 11. Therefore, it’s important to remain cautious and avoid high exposure to the stock.
Once there is further clarity on global growth and containment of the virus, however, investors can consider increasing their exposure to the shares.
Beyond the impact of COVID-19, the biggest issue facing the company is its growth in China. If Ford’s growth in the country revives in the next 12-18 months, F stock will surge higher.
Faisal Humayun is senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
