As hard-hit names begin to rebound, is it time to jump into Ford (NYSE:F) stock? Investors who bought at the bottom (under $4 per share) have seen quick gains as Wall Street prices in a recovery.
The novel coronavirus may soon be in the rearview mirror. But that doesn’t mean cyclical auto stocks will retrace past highs any time soon.
How so? For starters, even with the pandemic possibly behind us, don’t expect strong auto sales for 2020. According to IHS Markit, U.S. auto sales could plummet 26.6% over the prior year. Also, the bankruptcy of Hertz (NYSE:HTZ) could impact fleet sales. Fleet sales are not a major profit center for the industry. Yet, they do help cover the high-fixed costs of auto manufacturing.
That being said, don’t take this to mean it’s time to short F stock. With the company suspending its dividend and taking other proactive steps to preserve cash, the auto giant will likely ride out today’s storms. Yet, for investors buying in as prices remain below past highs, don’t expect an immediate rebound back to double digits.
In short, sitting this one out may be the best call. Let’s dive in and find out why.
F Stock Post-Pandemic
What’s next for Ford after we “return to normal?” The company reopened its plants on May 18, albeit with a few hiccups. Workers testing positive for the virus has meant some plants have temporarily shut down to ensure worker safety. But, in terms of assessing the company’s health going forward, it’s demand, not supply, that should be top of mind.
As I mentioned above, 2020 auto sales are projected to be much lower than in 2019. And it’s not just households tightening their belts that explains why it’s tough times ahead for the automaker’s sales.
On May 27, InvestorPlace’s Josh Enomoto highlighted many reasons why Ford’s sales could be affected. These include short-term issues like a glut in used cars, along with long-term issues such as the company’s poor market share among millennial and Generation Z car buyers.
I agree this long-term issue is a good reason why F stock may not be a great buy-and-hold opportunity.
But, for investors looking to bet on a rebound, it’s the short-term issues that are of more importance. Namely, the current glut in used car sales. And with the Hertz bankruptcy, expect this glut to accelerate. A flooded market means rock-bottom prices for used vehicles, affecting demand for new cars and trucks.
Also, the aforementioned car rental bankruptcy could be a sign of additional near-term troubles ahead for the automaker.
Bankruptcy Not as Bad as You Think
With news of rent-a-car giant Hertz filing for Chapter 11, you may have concerns how this could impact the company’s fleet sales. Yet, while this isn’t good news, it’s not as bad as you would think.
Considering the automaker used to own Hertz, one would assume the rent-a-car giant buys a large share of its fleet from its former parent. However, Ford vehicles made up just 12% of their fleet in 2019. Granted, the company needs as many fleet sales as it can get. But, the sudden drop in fleet sales from this customer pales in comparison to overall sales declines.
Nevertheless, this concern for F stock could accelerate if other car rental agencies file for bankruptcy. Advantage Rent-A-Car, a smaller chain, also filed for Chapter 11. The other major names in the industry, Avis Budget Group (NASDAQ:CAR), and privately-held Enterprise Rent-A-Car may manage to avoid bankruptcy. But, lowered demand due to the coronavirus may mean they’ll reduce their fleet purchases as well.
Granted, fleet sales aren’t what’s going to make or break Ford. However, this situation does highlight how much the automaker’s economic health is tied to that of the overall economy. In short, buying shares today is a bet on a V-shaped recovery.
Will we see a fast rebound, or an extended U-shaped scenario? That’s debatable. And as shares have trended higher on the heels of a potential recovery, now may not be the time to enter a position.
Hold Off on F Stock
In prior analysis, I discussed how the automaker’s shares had been oversold due to their coronavirus challenges. But, with its factories reopen, and Wall Street betting on a quick recovery, shares have started to rebound in recent weeks.
Yet, the stock may be getting ahead of itself. Between a continued weak U.S. auto market in 2020, along with other issues (rent-a-car bankruptcies) impacting sales, it may not be wise to jump into F stock today, as shares could easily pull back to past lows on a new wave of bad news.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
