Ford Stock Should Trade Above $9 but Long-Term Headwinds Hold It Back

The automobile sector is perhaps the biggest casualty of the novel coronavirus outbreak. U.S. car sales dropped at a steep rate in the first quarter. Even though the Trump administration has provided a stimulus package to shore up the economy, a possible second wave is leading many analysts to believe the recovery might not be V-shaped as previously envisioned. Due to these circumstances, its not surprising that Ford (NYSE:F) stock has come under fire. But the more significant issue is that the American multinational automaker was already in some trouble before Covid-19 came along.

Ford (F) trucks lined up on the lot of a Ford dealership.
Source: Jonathan Weiss / Shutterstock.com

The company’s share of all of its key markets has been declining over the last five years. Plus, electric cars are the next big thing in the automobile sector. And although Ford and General Motors (NYSE:GM) have unveiled plans to make electric vehicle cars as well, it will only be a small portion of their offerings.

It’s not like F stock is expensive, but the company faces long-term headwinds that have nothing to do with pandemic woes. As a result, shares remain a hold for me.

Covid-19 Will Have a Long-Term Impact on F Stock

The pandemic has had a profound impact on how we do things, including how we travel. However, even before that, changes in driving patterns had led to severe headaches for automobile manufacturers. Millennials and Gen Z’ers are eschewing driving in favor of ride-hailing and ridesharing. That’s why companies like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) have been on such a bull run in recent years.

Coming back to Covid-19, experts believe that drivers will use their cars less in the forthcoming years. Airlines are facing similar headwinds. Many people are opting for a Zoom (NASDAQ:ZM) meeting instead of flying to a nearby destination for a conference call. They are using social media apps to connect with family instead of driving cross country. We’ve already seen the impact of these attitudes on Hertz (NYSE:HTZ). The rental car industry is responsible for a sizeable number of deliveries. The Hertz bankruptcy underlines how stressed this sector has become due to Covid-19 and that’s not good news for automakers.

Analyst estimates reflect the view that it will be a long road ahead for Ford. Although revenues are forecast to improve from 2020 levels, those models show that the company won’t get back to 2019 levels, at least until 2023.

Image shows revenues for Ford (NYSE:F) and estimates from 2020 till 2023.
Click to Enlarge
Source: Chart by Faizan Farooque, data from S&P Global Market Intelligence

Ford Bronco is Lifeline

The first edition of the new Ford Bronco has sold out, and there is an insatiable demand for the product. This is a big win for Ford, especially since prior product launches of the Ford Explorer and Lincoln Aviator were not as successful. Here’s hoping the product issues that plagued these releases do not weigh down the Ford Bronco, which seems to be an excellent addition to the company’s line-up.

In speaking to CNBC, Credit Suisse analyst Dan Levy said early Bronco sales point to 125,000 units, adding roughly $1 billion to Ford’s pretax earnings. He also highlighted the heritage of the brand as a strong point. Ultimately, off-road models like the Ford Bronco should gain favor due to the pandemic situation. As many people remain skeptical of air travel, we could see these vehicles gain more traction.

Trading Below Book Value

If you settle on adding Ford to your portfolio, it’s not like you are purchasing a costly stock. At the moment, shares are still trading below $7, which I think is a sign of over pessimism. Based on the latest quarterly results, Ford’s book value per share was $7.72. I believe that shares should trade at or around $9 a piece — just where they were trading before the pandemic.

However, the problems identified above lead me to believe that systemic issues will continue to haunt Ford for the foreseeable future. That’s always a bad thing for any company; the notion that your best years are behind you and now you are just holding down the fort.

The ‘Farley’ Factor

Before wrapping up here, I wanted to talk about Ford’s newly ascended CEO, Jim Farley. The stock market popped on news of his promotion, and there was a reason for that. Farley is a company insider with extensive experience in how Ford operates. Investors are hoping he will incorporate a dynamic streak into those operations, the likes of which he showed during his time at Toyota (NYSE:TM). He was one of the leading lights behind the Scion product launch at the Japanese auto maker, and it is that kind of dynamic leadership that Ford shareholders are hoping the executive can replicate.

Tech giants such as Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), and Baidu (NASDAQ:BIDU) are not ambivalent to the automobile sector. They are making a play for space in the industry, and Ford, along with other car manufacturers, will have to adjust their strategies accordingly. Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO) are going all in to build artificial intelligence into their offerings.

That could be an area worth exploring for Ford and something that would pique Farley’s interest. The bottom line is that the company cannot function as an island onto itself. The threat from tech companies and EV makers is real, and the only way around it is to embrace the challenge head-on.

My Last Word

Ford is an iconic brand that has been around for ages. The impact of Covid-19, as big as it is, will not be the death knell of the company. However, persistent issues are gnawing away at revenues and market share. Despite the headwinds that the industry faces, General Motors, and Fiat Chrysler (NYSE:FCAU) have fared better than Ford in recent years, and their share prices are a testament to this fact. The Ford Bronco should provide some relief over the short-term, but it’s obvious the company has to pivot its strategy to make sure it remains relevant from hereon in.

F stock is a hold for me until incoming CEO Farley can make systematic changes to modernize the brand.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. As of this writing, he does not directly own the securities mentioned above.


Article printed from InvestorPlace Media, https://investorplace.com/2020/08/f-stock-should-trade-above-9-but-long-term-headwinds-persist/.

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