As the novel coronavirus nears its peak in the United States, vehicle sales have plummeted. Industry experts believe that the worst is still to come. It’s not surprising that automobile stocks have plunged. Ford Motor Company (NYSE:F) stock recently touched lows of $3.96.
With the Federal Reserve announcing extraordinary measures to stimulate growth and support the corporate sector, F stock has bounced back. However, this could be a potential “dead cat bounce” and I would remain cautious.
For the first quarter of fiscal year 2020, total vehicle sales for Ford declined by 12.5%. However, S&P believes that light-vehicle sales will decline by 15% to 20% in the United States for the current year. Even if Ford’s sales are in-line with the industry average, it’s likely that the coming quarters will be worse.
S&P is also estimating a sales decline of 8% to 10% in China for the year. Furthermore, European car sales are also estimated to decline by 15% to 20%.
Overall, the year is likely to be challenging for Ford and there is little reason to believe that F stock will trend higher. To underscore my point, J.P. Morgan believes that Ford is likely to report negative earnings per share of 65 cents for the year.
Strong Liquidity Profile
When it comes to surviving the crisis, I believe that Ford is well-positioned from a liquidity perspective. The company closed FY2019 with $22.3 billion in cash and $35.4 billion in total liquidity.
Further, the company announced dividend suspension in last month along with drawing $15.4 billion from two credit lines. Therefore, the company has bolstered its cash position to navigate the crisis.
However, Ford has a multi-year restructuring program that is estimated to cost $7.0 billion in cash. In addition, the company has a strong pipeline of new launches that will absorb cash.
Will the Sector Witness Sharp Recovery?
I cited that S&P report earlier, which estimates a sharp decline in light vehicle sales globally for the current year. The same report expects a strong bounce back in sales in FY2021. U.S. light-vehicle sales growth is expected at 10% to 12% for the coming year, as an example.
If there is indeed a v-shaped recovery in the industry, F stock can witness a sharp rally going into the next year. However, I believe that the S&P forecast might be optimistic.
Moody’s, which has warned on a potential downgrade for Ford opines that, “The Company is now additionally burdened by the prospect of a severe and prolonged decline in automotive markets precipitated by the coronavirus.”
St. Louis Federal Reserve President James Bullard believes that the unemployment rate in the United States could surge to 32%. Further, the International Labour Organization believes that nearly 200 million people can lose their jobs globally. The point I am making through these estimates is that as unemployment surges, consumer confidence will decline globally.
This will impact purchase decisions on non-essentials. Therefore, a deep slowdown in the automobile industry could extend will into FY2021 as the global economy crawls back to normalcy. In such a scenario, I don’t see F stock trending higher as growth and cash flows remain sluggish.
Further, China is a key market for Ford and the company had plans to launch 30 new models over the next three years (starting FY2020). The launches are likely to be deferred and will impact the company’s estimated growth trajectory.
An interesting view presented by KPMG is that people might be wary of using public transport even after the virus is contained. This can translate into higher demand and sale of cars. This will hold true if disposable income after the crisis allows consumers to make purchases.
My Concluding Views on F Stock
In the recent past, F stock touched a low of $3.96 and quickly bounced back to $5.39. The stock again declined to $4.24 and currently trades at $5.37. Therefore, the stock is providing attractive trading opportunities. However, long-term investors can still avoid the stock as the depth and duration of impact on the automobile sector still remains uncertain.
Ford is likely to survive the crisis with a healthy balance sheet. However, F stock will trend higher only when there is clarity on renewed free cash flows. That’s unlikely through FY2020 and potentially into the next year.
Faisal Humayun is a 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.
