Ford Offers Dead Cat Bounces, Not Many Other Reasons to Get Involved

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Ford (NYSE:F) shares much in common with some of the equities benefiting from the broad market’s mini-rally to start April. F stock is a low price tag name decimated by the novel coronavirus’s impact on the economy.

F stock

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It’s not uncommon for the most downtrodden names to rally on even the slightest bit of good news for the broader market. These days, that’s happening with airlines, cruise operators, and Ford on news that the Covid-19 curve is flattening. Still, F stock is facing considerable fundamental and structural headwinds.

A month ago, when Ford was trading around $7, I opined that a dividend cut or suspension was coming. At this writing, Ford stock resides around $5 and its payout has been suspended. With the dividend out the window, Ford equity investors are solely depending on capital appreciation. This, from a consumer discretionary company at a time when the economy will likely be in a recession that could last multiple quarters.

F stock is already reflecting some level of pessimism. The company said earlier this month that first-quarter sales fell 12.5%. Making the case flimsier for rolling the dice on Ford or a rival such as General Motors (NYSE:GM) is that January and February consumer and economic data were strong, meaning the toll of the coronavirus started emerging last month and there’s more to come on that in the current quarter.

F Is for Failure to Deliver

Investors can rationalize embracing plenty of controversial equities in the name of holding those names for the long term. Of course, it helps if the company has some history of delivering out-performance over lengthy holding periods. Ford doesn’t. Its average annualized return over the past 15 years is negative.

That’s in the past. While history doesn’t always repeat in financial markets, it often rhymes, and that doesn’t bode well for Ford. Even an investor looking to rationalize Ford’s past as, well, being in the past, can’t afford to overlook the present and future, neither of which are encouraging.

In March, domestic automotive sales dropped to a seasonally adjusted annualized rate (SAAR) of 11.4 million units, a 30% plunge. This month, that number could be in the 4 million to 5 million units range.

“Despite considerable declines in equity values since the start of the Covid crisis, we see additional downside risk for U.S. autos stocks,” said Deutsche Bank analyst Emmanuel Rosner in a recent note to clients.

Translation: Covid-19 is having a negative impact on automotive sales. The health risks associated with the virus and the effects on the economy are the perfect excuses for would-be car buyers to delay those purchases. With a recent spate of production cuts, Ford and other automobile manufacturers are acknowledging near-term demand will be challenged.

Bottom Line

There is some good news. Ford Motor Credit – the unit that drives most of the company’s profitability – has ample liquidity to endure a prolonged crisis. Additionally, the company is working with borrowers to help them stay in their vehicles and avoid repossession if they’re out of work due to the coronavirus.

Still, with factories around the world idled and buyers not visiting dealers, Ford is under duress, grappling with the ominous scenario of dwindling revenue and fixed costs.

“The rate of cash burn, even for a few months, could be faster than that which transpires during a typical recession,” said Standard & Poor’s (S&P) in a recent note.

Bottom line: if an investors insists on buying a name being punished by the Covid-19 pandemic, there are better ideas out there than F stock.

Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.

Todd Shriber has been an InvestorPlace contributor since 2014.


Article printed from InvestorPlace Media, https://investorplace.com/2020/04/f-stock-will-have-its-moments-but-the-outlook-is-challenging-for-this-stock/.

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