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Ford Has Limited Upside Despite Enthusiasm for New Product Lines

When I last wrote about Ford (NYSE:F) stock, I explained how, for the first time in several years, investors and analysts were starting to feel bullish on the stock. However, I stopped short of recommending a “buy” rating. Unfortunately, that sentiment hasn’t changed in the interim.

Ford (F) logo on a steering wheel.
Source: Proxima Studio / Shutterstock.com

Although F stock continues to rise, there are still long term issues, it will have to tackle before it can become a viable investment. Incoming CEO Jim Farley has his sights squarely on doing just that, but these turnarounds usually happen at a sluggish pace. Farley also has the unenviable task of cleaning up Ford’s balance sheet that is heavily debt-laden.

That’s why even though there are several positives to report; Ford shares remain a risky proposition.

F Stock Will Continue to Limp

Considering his background with the automaker, Jim Farley will surely be able to make several well-meaning changes to Ford in the next couple of quarters. Before assuming his new role, the newly minted CEO has already laid out an aggressive plan to generate recurring revenue through sales of services in its F-Series pickup truck and Transit vans. He has also reiterated the importance of technology in Ford’s future, excellent news for the average Ford investors.

Farley named Alex Purdy, former head of agricultural equipment maker Deere & Co (NYSE:DE) ‘s ‘s Silicon Valley office, as the man to lead the company’s new data-generated revenue arm. The executive is just the kind of person you need at the helm since he did much the same during his time at Deere. However, the transformation from a primarily commercial car company to a more service-oriented one will take its time, and it’s not a straightforward process either.

Debt Position Is a Headache

Even before this crisis started, Ford was stuck with an enormous debt pile. A loss of about $2 billion in the first quarter led to the company taking on $8 billion from corporate debt investors to bolster its cash reserves. The debt is enormously expensive. Ford will have to pay an interest rate of 8.50% to 9.625% on the obligations in a zero-interest environment.

The additional debt and interest expenses will weigh down Ford returns for several years. This is a company that hasn’t managed to pay back its debt from the 2008 financial crisis. Many at Ford would argue that there was no way around it.

It needs the money to stay afloat during this crisis when demand for automobiles is on the decline, and auto loan delinquencies are up. And while that may be true, the additional debt means profits will take a substantial hit moving forward.

I will give Ford credit where it’s due. Despite the pandemic, the automaker is fighting hard and it delivered a 70% beat on EPS estimates in Q2. But the company still lost $1.9 billion, leading to a 12-month return on capital of -2%. Bottom line: Despite some positives, it’s a long road ahead for the company.

Chart shows earnings surprise history for Ford (NYSE:F)
Source: Chart from Faizan Farooque, data from filings

Time to Electrify

Even though gas prices are low, EVs are still selling like hotcakes. Tesla (NASDAQ:TSLA)  is the industry leader, with 367,500 cars delivered in 2019, more than the past two years combined. The Silicon Valley automaker also beat Wall Street expectations for Q2 deliveries by 90,650 vehicles. Meanwhile, Nio (NYSE:NIO), the Tesla of China, has also had a bumper quarter, delivering over 10,000 vehicles for the first time in history.

The future is electric, and Ford understands this. It unveiled the all-electric Mustang Mach-E in November 2019. The car is expected to hit the roads later this year, and at $43,895, its a reasonably cheap mid-market option. Ford says a third of its vehicles will be electric by 2030. So, the Mustang is just the start.

However, it’s tough to see Ford make a significant dent in EVs. Tesla is the industry leader, even though several companies like Toyota (NYSE:TM) and GM (NYSE:GM) have entered the market with great fanfare, they haven’t had much luck. Tesla is the only EV company that has had a good experience with electric and plug-in hybrids in the United States. Whether Ford can replicate that success, considering its already struggling, is a matter of debate.

My Final Word

The car industry is in rough shape due to the pandemic. People are driving less, and even where social distancing regulations are reduced, we see reduced travel. However, Ford is suffering from issues that are unique to the company. Time will tell if new CEO Farley can navigate the automaker out of troubled waters.

Corporate debt has ballooned as a result of Covid-19. It will take years for Ford to repay it, and the interest expenses will weigh down results well beyond the crisis. Meanwhile, Ford’s future business lines will take a lot of time to get going. For all these reasons, I would stay away from F stock right now.

Disclosure: On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He 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.

Article printed from InvestorPlace Media, https://investorplace.com/2020/09/limited-upside-for-f-stock-despite-enthusiasm-for-new-product-lines/.

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