In a previous column on Ford (NYSE:F) stock, published on Mar. 26. I predicted that the novel coronavirus crisis would ease “within a couple of weeks,” driven by warmer weather and treatments. I also noted that President Donald Trump had said he would look to restart the economy soon, and I contended that the valuation of F stock did not reflect the imminent easing of the crisis.
As of this writing, exactly three weeks later, the government has tremendously lowered its estimates for the number of deaths that will be caused by the virus. Meanwhile, the number of new cases reported per day is generally dropping, and President Trump is poised to recommend that some parts of the country ease their closures before the end of the month.
Yet F stock is trading at $5.07, down nearly 50% in 2020 and meaningfully lower than the $5.71 level it had reached on Mar. 26. Moreover, the shares are trading at a price-sales ratio of just 0.13 and a price-book ratio of just 0.6.
As a result, I still believe that F stock is still undervalued. The price doesn’t reflect the reopening of the economy, which is set to begin soon and should be largely complete by the end of May. That reopening will, in turn, cause the number of miles driven to rebound, spurring more consumers to buy cars from automakers, including Ford.
Automakers Have Multiple, Little-Noticed Catalysts
It’s true that, for the next few months, overall driving levels will be meaningfully lower than in 2019 as some consumers avoid traveling due to their fears of the virus and restrictions placed on them by governments. That’s the trend that most pundits and analysts have focused on.
But for a few reasons, the decline looks poised to be shorter and less intense than many believe. First, based on what I’ve seen on my Twitter (NYSE:TWTR) feed, many people below the age of 50 are poised to resume taking their children places, going to restaurants and retail stores, and visiting their friends and families immediately after the closures are eased.
Secondly, exceptionally low gasoline prices will enable many people who want to travel to do a great deal of driving once they’re allowed. The low gasoline prices will also likely spur relatively strong demand for SUVs and crossover vehicles, which is Ford’s main focus these days (no pun intended,)
Finally, many consumers who previously relied a great deal on mass transit are likely to switch to automobiles. After all, social distancing is much easier in an automobile than on a bus or train.
Upper Income Spending and Self-Driving Vehicles
As I noted in a prior column on Roku (NASDAQ:ROKU), many of the industries that tend to pay their employees the most have either benefited from or have been largely unaffected by the crisis. As a result, I believe that a majority of the consumers who had been able to afford new vehicles before the crisis will still be able to do so.
Further, the outbreak could cause demand for self-driving vehicles to jump. As a result, many companies, including Ford, will likely accelerate their deployment of such vehicles and begin realizing revenue from such vehicles sooner than many expect.
As Prith Banerjee, the CTO of Ansys, a simulation software company, pointed out:
“The COVID-19 crisis has accelerated the need for and opportunity for automation in every industry, including autonomous driving … In the future, autonomous vehicles can certainly have many positive applications, including some that would help in a global pandemic (and even everyday life) — delivering food, delivering medicine, transporting people while maintaining social distance,”
The Bottom Line on Ford Stock
Due to GM’s (NYSE:GM) higher exposure to the Chinese market (through joint ventures) and autonomous driving, I continue to be more upbeat on GM stock than Ford.
But Ford stock has dropped more than GM’s shares during the crisis, and F stock has greater exposure to SUVs and crossovers than GM. Consequently, I think that longer term investors will not go wrong with either name at this point.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any of the aforementioned stocks.
