With shares rebounding more than 30% in the past week, have we reached the bottom with Ford (NYSE:F) stock? The automaker’s shares fell significantly during the market sell-off driven by the coronavirus from China. As a result of mass shutdowns, their North American auto plants sit idle. But, with a $2 trillion stimulus package signed into law, could the company’s prospects be looking up?
It depends. It remains to be seen if the COVID-19 outbreak will be a short-term hiccup or long-term headwind for the global economy. And as a capital-intensive, cyclical business, Ford could lose big in a prolonged recession. As InvestorPlace’s Brad Moon wrote, Standard and Poor’s (S&P) recently downgraded the automaker’s debt to junk status. Things could get worse before they get better.
Yet, what if these negative factors are already priced into F stock? If the current shutdowns caused by the outbreak fade away and we get back to business, shares could quickly rebound to prior levels. The automaker’s financial discipline may also give them the means to weather the storm, further bolstering the chances of a return to normal. If and when that moment comes.
Nevertheless, this may not be one of the stronger “contrarian COVID-19” plays out there. Let’s dive in and see what’s the verdict with F stock.
How F Stock Could Surprise in the Near-Term
With the stock falling from above $9 per share in late January to as low as $3.96 per share before the stimulus rally last week, low expectations could already be priced into shares. So, what case could you make that Ford continues to move higher post-stimulus bill?
As InvestorPlace’s Jamie Johnson wrote on March 27, there are many reasons why Ford could bounce back. Firstly, has the liquidity to work through factory shutdowns. Secondly, the company’s move to suspend its dividend helps to ensure their financial house remains in order. Thirdly, while the company is putting out the current fires (COVID-19), future catalysts like electric vehicles and self-driving cars aren’t off the table.
Over the long haul, Ford has a strong chance of not just surviving, but thriving in the changing automotive market. I agree with most of these points. Yet, these factors only ensure the automaker “survives” (i.e. doesn’t go bankrupt).
It has little to do with the near-term performance of F stock. And taking a closer look at the negatives, it’s clear shares could take an additional dip.
Shares Could Head Lower
There are many factors at play that could mean Ford stock weathers the current crisis like it did the Great Recession. But this provides cold comfort with regards to near-term share price performance. The Wall Street analyst community remains neutral on shares.
This includes analysts like RBC’s Joseph Spak and Benchmark’s Mike Ward. Both are cautious on the stock, giving it the equivalent to a “hold” rating. Spak points to stats from S&P (in conjunction with the their downgrade), showing that Ford’s EBITDA margins will likely remain below-average for the time being. Ward pointed out in his analysis that S&P’s downgrade will result in “more costly funding.”
In short, this puts Ford at a disadvantage. Perhaps investors are thinking too much of Ford’s past success weathering a downturn. This time could be different. For one, the stimulus bill helps out the overall economy. But it does not provide provisions directed squarely at automakers.
That’s not to say the big three American car makers won’t see some relief. The bill may help suppliers staying in business, and help shore up customer demand. But comparing Ford’s valuation to that of General Motors (NYSE:GM), the latter legacy automaker may offer a better risk/return proposition.
Ford shares currently trade at a forward non-GAAP price-to-earnings (P/E) ratio of 15.9. By contrast, GM stock trades at 5.9 times forward non-GAAP earnings. Also, GM trades at a lower enterprise value/EBITDA (EV/EBITDA) ratio than Ford (9.3 versus 13.9).
In short, GM stock may offer a more temping rebound play than F stock. Both car companies aren’t exactly in a great place. But in terms of risk/reward, the one with the lower valuation may offer better opportunity.
Watch Out, Even as the Falling Knife Rebounds
We shall see whether the stimulus-driven rally is a sign of a rebounding market. Or your classic “bear trap.” Either way, Ford shares may not be your best COVID-19 rebound play. Industries like airlines, casinos, retail, and restaurants could offer more clear opportunities. Even in the auto space, GM stock (based on valuation) seems to offer a better proposition in terms of upside.
In other words, watch out with falling knife F stock. Shares may have rebounded from under $4 per share to over $5 per share in a matter of days. But it may pay to wait-and-see, and enter at a more compelling entry point.
Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.