Industrial companies have not fared especially well with these recent market turmoil. While tech, healthcare and a few other sectors have bounced back sharply, investors are rightly cautious to race back into manufacturing operations. That includes Ford (NYSE:F) stock as well.
Companies like Ford tend to have high fixed costs, large obligations for things such as pensions and environmental compliance costs, and the like. It prevents them from getting lean during downturns. In the 2008 financial crisis, General Motors (NYSE:GM) went bankrupt and Ford only narrowly averted a similar fate.
Against that backdrop, how should investors think about the auto companies now?
The good news is that Ford is in better shape to tackle this crisis than it was in 2008. However, that’s not necessarily a green light to go buy its shares tomorrow either. Here’s what you need to know.
All Eyes On Ford’s Balance Sheet
One big concern for Ford – and the other auto companies – are their credit ratings. Keep in mind that the auto manufacturers make a huge portion of their profits from financing. While the actual profit margins on vehicle sales may not be huge, they tend to make it up by making a tidy sum as consumers take on credit to manage their purchases.
However, you need plenty of cash to arrange that. When the manufacturer gets into financial trouble of its own, it makes it harder to secure funds at a decent rate to extend to customers.
Also, given the unique economic challenges around the novel coronavirus, many auto dealerships are facing a huge cash crunch. A dealer has a ton of their assets tied up in the cars on the lot. Normally, cars sell pretty quickly, turning that inventory into cash. If car sales remain subdued throughout 2020, many dealers may run into trouble, and Ford might need to step in as a lender of last resort to keep its distribution system humming.
Additionally, Hertz’s (NYSE:HTZ) recent bankruptcy filing will likely add many gently used cars to the market at fire sales prices, causing some consumers to put off buying a new vehicle.
Credit Rating and Dividend Implications
With all this in mind, Ford needs to keep a sound balance sheet. Unfortunately, in March, S&P cut the company’s credit rating into junk territory, and Moody’s put it watch for a downgrade as well. This has put the automaker fully in defensive mode. The company is having to cut costs and raise cash.
This all comes at a bad time, as we’re in a pivotal moment for the auto industry going forward. Companies like Ford need to be full-speed ahead of electric vehicles and autonomous driving so that newer entrants like Tesla (NASDAQ:TSLA) don’t steal their thunder. But with Ford now in crisis mode, it could miss a golden opportunity to claim leadership in the next generation of vehicles.
Adding to the mess, with the balance sheet concerns, the company also had to suspend its dividend. Previously, it had offered shareholders a great dividend; shares had often yielded 5% or more in recent years. With the income gone, many shareholders are abandoning F stock, putting downward pressure on the share price.
F Stock Verdict
For F stock, it’s all going to come down to how quickly the economy truly recovers. Yes, things are reopening now. But there’s a big difference between going to a mall or fitness center again and making large purchases.
The auto companies need consumer confidence to reach more normal levels. That, in turn, will require people to feel confident about their income and employment prospects going forward. With the possibility of a second wave of the virus, I’m skeptical that most people will be ready to start making new vehicle purchases again.
Don’t forget that the election is coming up in a few months as well. That could cause general uncertainty about what’s going to happen with the economy. The election also raises the possibility of trade war and supply chain concerns depending on who wins.
All that to say that Ford is a complicated question right now. It could certainly work out if everything goes to plan. However, there are much simpler ways to bet on an economic recovery at this time. You’ll likely get a better entry point to make a move on Ford if and when there’s clearer evidence of an economic turn in a few months.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a junior analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.
