After Ford (NYSE:F) stock plunged to $4 in late March — to levels not seen since the financial crisis in 2008 to 2009 — the shares have staged a decent rally. In fact, the return on F stock is about 27% from those levels.
However, it’s important to keep in mind that F stock is still down 45% since the start of 2020. By comparison, General Motors (NYSE:GM) is down 39% and Toyota Motor (NYSE:TM) is off by 12%.
With the horrible impact of the novel coronavirus pandemic, Ford’s core operations have come under extreme pressure. Demand has dried up, and the production facilities have been shut down. However, the company provided some color on all this a week ago when it reported the preliminary results for the first quarter; Note that the company will announce the full results on April 28th. The estimate was for a $600 million loss and a 16% drop in revenues to $34 billion (the guidance for 2020 was withdrawn last month).
In the press release, Ford CFO Tim Stone had this to say:
“We continue to opportunistically assess all funding options to further strengthen our balance sheet and increase liquidity to optimize our financial flexibility. We also are identifying additional operating actions to enhance our cash position.”
It’s kind of vague, which is understandable. However, it seems likely there will be an increase of debt and perhaps even an equity raise, which would dilute F stock.
In the meantime, the company has already taken swift actions to restructure its operations. There was — for example — the suspension of the dividend, which will reduce the cash burn by $2.4 billion, and the draw down on $15.4 billion from credit lines. Ford is also exploring aggressive reductions in operating costs (including partial deferrals of executive salaries) and capital expenditures. For now, the company has roughly $30 billion in the bank.
So, what is the runway? Well, the press release mentions that there should be enough cash to last through through the end of the third quarter. And this assumes no increases in productions.
The Good, the Bad and the Ugly of the Car Market
Now, there are certainly positives for Ford. With oil prices at rock-bottom levels, this makes owning a car much cheaper — at least in the near-term.
Another advantage is there may be less demand for ride-sharing services like Uber (NYSE:UBER) and LYFT (NASDAQ:LYFT). Hey, how many people will want to enter the car of a stranger nowadays? Might as well buy a car, right?
This seems reasonable, I think.
But unfortunately, there remain many lingering issues and problems with Ford. With the economy in free-fall, consumers will be reluctant to make big-ticket purchases. And while the federal government has been quick with stimulus spending, this will probably not be enough. It seems likely that there will continue to be high levels of unemployment throughout the rest of the year. This could also adversely impact Ford’s credit business, which could see a spike in defaults.
Moreover, the coronavirus may have a “second wave.” This could come in the fall, as was the case during the 1918 Spanish Flu. In other words, there could easily be a prolonged economic downturn.
Bottom Line on F Stock
In an interview with Barron’s, the founder of the CFRA (Center for Financial Research and Analysis), had this to say:
“We think this is worse than the financial crisis because longer term we don’t see consumer discretionary spending coming back in the same way. We haven’t ruled out the possibility of a bailout. The cash burn rates of Ford Motor (F) and General Motors (GM) imply that it could be a possibility before the end of this year.”
Yes, this is a grim outlook — and it looks to be far from a worst-case scenario. Thus, when it comes to F stock right now, it’s probably best to hold off on a purchase.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.
