3 Reasons It Makes Sense to Steer Away From Ford Stock Right Now

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Along with other automakers like GM (NYSE:GM) and Toyota Motor (NYSE:TM), Ford Motor (NYSE:F) has staged a nice rally since March. F stock alone has added nearly 25%.

3 Reasons It Makes Sense to Steer Away From Ford Stock Right Now

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While part of this has been due to a bull move in the overall markets as well as a highly favorable monetary policy, the auto industry is showing some positive signs.

The Chinese market, for example, has been able to make a comeback. There are also the positives of rock-bottom interest rates and low gas prices. As a result, the U.S. market has actually seen strength with sales from trucks, and automakers also plan to resume production next week.

As for Ford, the company has been able to swiftly adjust to the novel coronavirus pandemic. Oh, and executives are seeing value with the shares. To this end, chief operating officer James Farley recently shelled out $1 million for F stock.

So there are certainly reasons to be optimistic. Yet I still think there remain some major challenges and investors should be cautious. Ford was struggling even before the coronavirus hit.

So then, let’s take a look at some of the worrisome risk factors for the company:

Autonomous Driving, Electric Vehicles and F Stock

The austerity measures for Ford are necessary, which include a 10% reduction in capital expenditures. There will also likely be more cost-cutting efforts this year.

But these actions will have long-term adverse consequences. The company has little choice but to scale back on innovation programs.

We’ve already seen this with the delay in the launch of its autonomous-driving service (to 2022) and the nixing of the Lincoln EV (electric vehicle) partnership with Rivian Automotive.

What this means is that other companies, especially tech operators like Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) Waymo and Tesla (NASDAQ:TSLA), will be able to have even more opportunities to dominate important next-generation markets.

Finances

Cash is certainly king right now. This is especially the case for automakers, as the fixed costs are enormous.

Ford has taken actions to get much more liquid, though. The company sold about $8 billion in bonds and has drawn down on its $15 billion of its credit line. There was also the suspension of the dividend payout. As a result, there is about $35 billion in its coffers.

But of course, the cash is burning at a rapid pace – and Ford estimates that the runaway will extend to the end of the year. Yet the company may ultimately need to do an equity offering at some point. And this would put further pressure on F stock (consider that market capitalization is also at lower levels, at about $20 billion or so).

The Macro Economy

The economic numbers are certainly horrific. We are seeing unemployment and GDP levels not seen since the Great Depression.

Now it’s true that states are starting to open and this should gin up more growth. But a recovery could ultimately be slow. Keep in mind that this is what happened after the financial crisis in 2008-2009. The shock to the economic system was just too severe.

According to Mark Zandi, who is the chief economist at Moody’s Analytics, he believes that the US economy will not fully recover until the mid-2020s. He notes:

“Even if the U.S. business restart goes reasonably well, and the virus remains largely contained, a surge in business failures and bankruptcies is likely and will impede any economic recovery. Too many of the unemployed won’t have jobs to go back to. New businesses will ultimately form and fill the void, but that will take time.”

If this scenario plays out – which does seem reasonable under the circumstances – than F stock is likely to have a tough time getting traction. For the most part, growth will be fairly sluggish in the coming years.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence BasicsHigh-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.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


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