The automaker-sector rout has been one of the most painful aftereffects of the spread of the novel coronavirus. And, watching Ford (NYSE:F) shares get cut in half in the wake of the Covid-19 outbreak wasn’t exactly a pleasure trip for F stock investors.
Buying a new vehicle isn’t generally top-of-mind for today’s consumers. Unemployment remains high and the government-issued stimulus payments have mostly already been spent. Besides, stay-at-home mandates have made people more comfortable with working at home and enjoying recreational activities there as well.
On top of all that, a recent release from Moody’s emphasizes Ford’s cash-burn problem. That’s a valid concern, but should it dissuade prospective investors from owning F stock? An honest and forward-looking assessment might actually provide hope despite Ford’s, and the nation’s, admittedly challenging circumstances.
The Rating and the Rationale
We briefly alluded to the unfavorable Moody’s release, so let’s dive into the dirty details. The long and the short of it is that Moody’s issued a rating of “Ba2” on Ford’s unsecured debt. The analytic firm also said that “the outlook is negative” for Ford while confirming that a “possible downgrade” might be in store.
For one thing, we need to appreciate just how harsh Moody’s assessment actually is. A “Ba2” rating isn’t the worst possible one, but it’s pretty bad. Informally, we can say that it’s a step above “junk” status. And the “outlook is negative” comment only adds insult to injury.
Moody’s is a highly respected analytic firm, so its ratings should be taken seriously. The primary stated reason for the negative assessment is Ford’s cash burn, which is indeed considerable and could persist for a while.
How bad is the cash burn? Moody’s projects that it will total around $8 billion this year and an additional $3 billion next year. Granted, that’s a whole lot of cash burn, but notice how the burn rate tapers off considerably from this year to the next.
Besides, Moody’s fully concedes that Ford has sufficient capital to cover that rate of cash burn and then some. Specifically, Moody’s acknowledges Ford’s “pro forma March 31 cash liquidity position of $42 billion,” which “will provide it with ample liquidity to cover the sizable cash burn the company will generate through 2021.”
More Cars, More Hope
So, perhaps Ford’s cash burn isn’t so terrible when put into context. Ford is a massive and capital-rich company. Running out of money isn’t an issue that F stock investors need to fear, at least for the foreseeable future.
The return to previous highs in F stock depends, more than anything else, on a rebound in the overall economy. That, of course, is beyond Ford’s control. However, to a certain extent at least, the company can control its approach to restarting its vehicle production.
On that front, Ford is doing better than many people would have expected just a couple of months ago. By May 11, Ford had already reopened its parts depots. A week later, the automaker opened all but two of its North American assembly plants. And by the month’s end, those two plants were opened back up as well.
We don’t want to paint too sunny a picture here. On May 19, the company had to halt its production at a couple of its plants because workers had tested positive for the coronavirus.
And in Mexico, the government hasn’t reopened the country as quickly as some people might have hoped. Hopefully, Ford will be able to reopen its factories there in the near future.
Still, the return to full production capacity seems inevitable. A timetable can’t be provided, but investors should remain patient as the global economy’s recovery will take time.
The Takeaway on F Stock
In some respects, the recovery of F stock will run parallel with the recovery of the economy and the consumers that support it. Moody’s might choose to downgrade Ford, but investors needn’t worry as a return to full production, while gradual, is already in progress.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
