Ford (NYSE:F) announced April 2 that its U.S. sales fell 12.5% in the first quarter of 2020. Although the decline was 160 basis points better than Edmunds’ estimate, F stock fell on the news.
Year to date, F stock generated a total return of -49%. Over the past 15 years, the company’s annualized total return is -1.1%. While long-time Ford shareholders (the Ford family comes to mind) have been losing ground, the U.S. markets as a whole delivered a positive annualized total return of 7.4%.
There is no way to describe this kind of performance except to say it’s unacceptable.
Maybe Too Optimistic
Ford stock is trading at its lowest point since 2009. Before the coronavirus reared its ugly head, some InvestorPlace contributors were cautiously optimistic about its chances in 2020.
“Ford is in a good position to benefit from sales of new 2020 models, especially in the SUV category. It has some 2019 units in inventory, but since 2020 models are already selling, profit margins will inch higher throughout next year,” Chris Lau wrote October 15.
“At a recent price of around $9 a share and a dividend of almost 7%, investors should buy Ford at current levels.”
First, let me say that I’m not trying to point out Chris’s call, but that there was still a lot of optimism that Ford CEO Jim Hackett could pull the company out of its tailspin.
Around the same time my colleague was writing about Ford, I too had cautious optimism due to a joint-venture partnership it announced October 1 with India conglomerate Mahindra & Mahindra (OTCMKTS:MAHMF). It is a partnership that could revive the company’s sales in emerging markets like India and elsewhere. On October 3, I wrote:
Ford has spent more than $2 billion in India to gain a 3% market share. That’s abysmal. The company had two options: Abandon India entirely or partner with another company that has a permanent and vested interest in the Indian automotive market. Given the size of the Indian market and the amount of capital Ford’s already sunk into it, the choice for Jim Hackett was an easy one. Long term, this could be very good news for Ford stock.
Can F Stock Make Its Way Back?
Naively, I continued to believe that Ford can make its way back from the wilderness.
In my most recent article about Ford in early March, I suggested that the record U.S. household debt was going to make it difficult for the company to grow. Now that the coronavirus has devastated the economy, this seems like a colossal understatement.
With gas prices at record-low levels, Ford is going to be tempted to boost sales of its F-150 gas guzzlers to keep all of its balls in the air, and in the process, slowing its drive to electrify its vehicles. In my opinion, that would be a short-sighted mistake.
Perhaps my final comments from March best illustrate how things have changed for Ford in the past five weeks.
“Long-term, I like Ford stock. Compared to the other 32 names under $10, it remains one of, if not the best bet to make money over the long haul,” I wrote March 6. “But you’ve got to be patient. You’re not going to be rewarded, except for the dividend, in the next 12-18 months. And that’s okay.”
Well, as investors know, Ford suspended its dividend on March 19 to preserve cash. It’s a move that only increases the pressure Hackett faces from the Ford family, whose financial net worth is inexorably tied to the company.
According to Automotive News, one analyst believes the coronavirus will cost the company $1 billion in earnings before interest and taxes. As a result of COVID-19, Ford has been forced to shut down production in both North America and Europe, its two strongest markets.
To survive this shock to its system, Ford maxed out its two lines of credit, doubling the amount of cash on its balance sheet to $30 billion. In 2019, Ford paid out $2.4 billion in dividends. By suspending it, the company will save approximately $600 million per quarter in cash.
While I’m sure the Ford family isn’t happy about a dividend suspension, Hackett had no choice. It was a no-brainer given the company continues to underperform relative to its peers.
The Bottom Line on F Stock
When I wrote my March article, there were 33 stocks (market capitalization higher than $10 billion) trading under $10. Fast forward to April and the number’s only increased by two to 35. Interestingly, of this cohort, 18 are also trading under $5, one of them is Ford.
Do I think Ford is a buy under $5?
I do, but only for the most aggressive investors who understand the concept of risk to reward. Everyone else ought to steer clear until there’s a more normal automotive marketplace.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
