Since the beginning of the novel coronavirus driven crisis, Ford Motor (NYSE:F) stock has traded twice near $4 levels. These levels have not been breached as F stock has moved higher on each instance. Even with the company reporting first-quarter results for 2020, there was no knee-jerk reaction on the downside.
The company has also provided guidance for Q2 2020, which might be the worst quarter in the crisis. This seems to be discounted in the stock and I believe that the stock has bottomed out. Therefore, at current levels of $4.97, the stock is worth considering for a medium to long-term investment horizon.
As a quick look into the company’s recent quarterly earnings, net loss was at $2 billion. Further, adjusted free cash flow was -$2.2 billion. For the coming quarter, Ford believes that the loss at EBIT level is likely to be $5 billion. Therefore, there is no doubt that the worst is yet to come in terms of losses and cash burn.
However, the good news for investors is that Ford is well positioned from a liquidity perspective. With the company having a total liquidity buffer of $35.1 billion, no further financing is required for the current year. It’s worth noting that for the current quarter, the company has $13 billion in supplier payable. Past this outflow, the cash burn is expected to decline.
Overall, Ford did require a government loan during the financial crisis of 2008-2009. In the current crisis, Ford seems better positioned. This is a positive trigger for F stock.
Second Half of Year Likely to Be Better
In all probability, the second half of the year will infuse some optimism related to the sector. To put things into perspective, China’s automobile sales plunged by 79% in Feb. 2020. However, for Q1 2020, the decline in car sales was 42%.
With the economy re-opening, there is a gradual improvement in automobile sales. Of course, it’s optimistic to expect sales to return to 2019 levels anytime soon. However, gradual improvement in sales will arrest the cash burn on a relative basis.
Another potential catalyst is a stimulus package for consumers to boost consumption spending. As an example, China has already extended the subsidies and tax break for new energy vehicles for two years. Ford has ambitious plans for China in the electric vehicle segment and stands to benefit from the policy decision.
Even in the United States, auto sales have declined sharply in April 2020. However, with states re-opening economic activity, sales are likely to be better in the coming months. Factors such as discounts, 0% financing offers, and online sales can also help in boosting sales volumes. I am not suggesting strong sales growth or sales close to last year levels. The only point is that the worst in terms of sales decline and cash burn is likely to be over in the current quarter.
New Model Launches Can Trigger Growth
Ford has several new launches in the next 12 to 24 months and as markets crawl back to recovery, the company stands to benefit.
Among the launches, the all-electric Mustang Mach-E, the redesigned F-150 and Ford Bronco can be potential sales game changers.
In addition, the launch of several electric version of models in Europe can support sales volume upside. Ford Escape and Kuga are the likely EV launches in Europe.
A potential risk to this assumption is that the coronavirus can last longer with a deadlier second wave. However, the world is likely to be better prepared to tackle a second wave. Gilead Sciences (NASDAQ:GILD) has announced that the U.S. Food and Drug Administration has approved the use of antiviral remdesivir to treat Covid-19. A potential vaccine in the coming quarters can also be a gamechanger.
My Final Views on F Stock
The current quarter is likely to be the worst for Ford in terms of cash burn. Slow recovery is likely to follow with support from the government to boost consumption spending.
The launch of new models in the U.S., Europe and China can trigger sales volumes growth in FY2021 and beyond. For now, the most important factor is that the company has ample liquidity to navigate the crisis.
As several states re-open their economies and auto sales volumes get some boost, I expect F stock to trend higher in the coming months.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
