When Ford Motor (NYSE:F) tested the $4.00 bottom twice in the last month, the market signaled a faint willingness to bet on a recovery in automobile sales, and that there was tentative confidence about F stock.
And while car sales will slump while the lockdown in the U.S. persists, there is light at the end of the tunnel. For example, China’s automobile demand showed signs of recovering, suggesting the same may happen in North America. Honda Motor (NYSE:HMC) resumed full production at pre-virus levels in China. In fact, the company re-opened last month in March.
Last month, China’s March passenger sales fell 41% year-on-year to 1.08 million units. Given the country’s activities related to eliminating the novel coronavirus outbreak in the region, the auto sales figures are encouraging.
Tesla (NASDAQ:TSLA) sold its highest-ever number of vehicles in China in March at 10,160 units. So, if sales in April rise from March’s levels, then Ford has a good chance of reporting improved sales, too. Also, the current slowdown may not affect Ford’s Mustang Mach-E release estimated for early 2021. Customers who reserved a vehicle will not need to have the money ready until then.
Investors cannot predict when the lockdown in North America will end but may still take a guess. So, an optimistic scenario suggests a recovery in F stock sooner. That is, if the government allows businesses to reopen by mid-May, then Ford may start planning for a re-start in automobile production.
Risks for F Stock
A sharp drop in disposable income and a need to spend on more pressing items will delay the recovery in the automotive sector.
Ford suspended its dividend to preserve cash, signaling trouble ahead. It also told its lenders it will draw down $15.4 billion from its two credit lines. The cash burn will hurt Ford’s balance sheet and potentially raise its debt outstanding. The company will eventually need to re-start its business soon. But it is at the mercy of the lockdown, just as other automobile companies are, too.
Ford’s production of air-purifying respirators for front-line workers does not suggest the company is headed in the wrong direction. If anything, helping to fight the coronavirus will only earn positive recognition from the public.
Injecting the balance sheet with additional liquidity ensures Ford’s long-term survival. It may pay the bills and keep operations running at minimum levels while it weathers the storm. In contrast, competitors like Nissan (OTCPK:NSANY) had to furlough around 10,000 staff until late April.
Honda Motor also put half its staff on leave. Besides, Nissan was late in seeking a $4.6 billion credit line. Banks may hesitate in lending to Nissan because it is in the middle of a much-needed structural and product design turnaround. The company already cut its dividend and profit forecast in February, before the coronavirus pandemic stuttered the world economy.
Even though Ford will have to compete with Honda and Toyota (NYSE:TM) for sales, a weakened Nissan would benefit all automobile firms.
Valuation and Your Takeaway
Most analysts are neutral on Ford stock, giving a “hold” rating and an average $7.06 price target. The stock scores an impressive 96/100 on value:
|Stock Rover Metric||F||Industry||S&P 500|
|Price / Earnings||100+||10.4||20.1|
|Price / Sales||0.1||0.4||2|
|Price / Free Cash Flow||2.2||82.7||19.2|
|Price / Book||0.6||0.8||3.1|
|Price / Tangible Book||0.7||1.3||100+|
Data Courtesy of Stock Rover
Investors have few tools available to model a fair value on the stock. Still, Ford will likely report a sharp drop in revenue this year. This may follow with a recovery in the following 4 years through the fiscal year 2024:
|Fiscal Years Ending||19-Dec||20-Dec||21-Dec||22-Dec||23-Dec||24-Dec|
|% of Revenue||7.20%||15.00%||13.00%||13.00%||13.00%||13.00%|
Data model courtesy of finbox.io.
In a 5-year discounted cash flow revenue exit model, a 7% discount rate suggests that F stock is worth at least $7.00 a share.
Disclosure: the author owns Ford stock.