Ford: Hopefully Sales Show A Case For (And Against) Automakers

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There seems to be a simple and interesting bull case for Ford stock (NYSE:). Shares of the US auto giant were cheap, less than 7x the consensus earnings forecast for this year. However, the company should have growth potential as its planned lineup of electric vehicles (EVs) comes to market.

Lately, the bull case hasn’t helped: Ford’s stock has nearly halved from its January high.

It is possible that the sell-off is a buying opportunity, with F stuck in a broad market downdraft. But most likely the simple bullish case is not as attractive as investors believed at the start of the year.

There’s a real challenge here and a valid reason why F shares are priced at such low multiples of backwards-looking earnings. Ford’s sales for May highlight those challenges and show why the bull case isn’t as simple as it seems.

Ford Shares with 7x Penghasilan Earnings

From a headline perspective, the Ford looks pretty cheap. As noted, Ford is valued at 7x estimated revenue this year; Tesla (NASDAQ:) is trading at 59x on the same basis. Ford’s dividend yield is also a healthy 3%.

However, in the historical context, both the P/E multiple and the dividend yield are not too different. For most of 2010, Ford stock received multiples of single-digit P/E. For much of that decade, low P/E multiples were not enough.

F’s stock ended 2019 below $10, down nearly half from its 2014 level. As the stock slipped, Ford’s dividend yield continued to rise; in December 2019, F made 6.3%, more than double its current level.

Simply put, Ford’s own history shows that the stock isn’t guaranteed to go up just because it looks cheap. In addition, there are cases that stocks should look cheap, especially at this time.

After all, there are fewer cycle businesses than car manufacturers. Demand can fade significantly when the economy declines. And investors generally discount cyclical stocks because of their inconsistent earnings. At a time when a recession could see Ford’s revenue plummet, there’s even more reason to be cautious.

There are also long-term concerns. Cars have an ever-increasing useful life. In 2000, there were 17.4 million light vehicles sold in the US. It didn’t peak again until 2015—and only thanks to consumer caution in the years following the 2008-09 financial crisis. In 2019, a year of a strong economy, unit sales are still more than 2% below the 2000 level.

For this reason, other legacy car manufacturers receive similar treatment from investors. General Motors (NYSE:) is trading at less than six times its consensus earnings estimate this year. Toyota (NYSE 🙂 is at 10x, even with greater penetration of the faster growing markets in Asia as well as hybrid and electric vehicles (the company estimates EVs will account for about 28% of unit sales this year).

In the context of history and sector, Ford stock is not very cheap. And that needs to be repeated: it was cheap before, but it didn’t do much for shareholders.

Electric Vehicle Growth

To be sure, analysis so far has overlooked a key catalyst: Ford’s grand plans for its own EV business. At a presentation in early March, management announced a production target of more than 2 million EVs by 2026. The company sold 2.4 million units in 2019, and only 1.9 million last year.

Such scale should lower costs—and increase profits. Ford expects operating margins for the year to reach 10 percent, up from just over 7 percent last year. Even if it can capture a small portion of the EV market, there seems to be plenty of room for profit. Tesla has a market capitalization of $740 billion, more than thirteen times that of Ford.

Optimism about the EV strategy helped keep Ford’s stock soaring in 2020 and 2021 (the stock is up more than 500% from March 2020 lows). And a possible reversal of that optimism has contributed to the recent sell-off; All types of EV related stocks (including TSLA) have been declining year over year; many started selling last year.

But recent skepticism makes sense. There are real questions about how, exactly, manufacturers can secure the minerals needed to manufacture the batteries that power electric vehicles. Lithium supplies, in particular, seem insufficient. Even manufacturers who can find lithium will pay a heavy price: prices have gone up 400%, which in turn will make EVs more expensive. Even if the US (and the world) avoids a near-term recession, the EV outlook looks dimmer than it did a few months ago.

Internal Combustion Engine Problem for Stock F

But EV adoption is going forward, Ford has another major problem. EV sales and internal combustion engine (ICE) sales are zero-sum. EVs are not additive to the market as a whole; they just replace the old model.

And Ford’s current profits and revenues come almost solely from those older models. This is not a problem that Tesla or Lucid (NASDAQ:) or Rivian Automotive (NASDAQ:) has to deal with.

As a result, the apparent discrepancy between the ratings applied to EV manufacturers only and those applied to Ford is plausible. As Ford’s EV penetration grows, its ICE profits will decline. There is no two ways about that.

Indeed, we’ve seen that much. Ford’s sales in May seem to strengthen the EV-based case for the stock: EV unit sales increased 222% year over year.

That’s the good news. However, Ford’s total sales still fell 4.5%, thanks to a 7.3% decline in ICE sales.

It’s possible Ford’s EV sales are growing faster than ICE sales are falling. Indeed, the company did take US market share last month. But that does not guarantee that the company can generate overall growth. At the very least, that growth will be tempered at least to some extent by a shift in customers away from its ICE lineup—including the market-leading (and highly profitable) F-150 pickup.

This doesn’t mean Ford’s stock will go short, or the company will go bankrupt. Of course there is still some potential for growth over time, even if results in the coming quarters show some weakness. And at 7x earnings, Ford’s stock has room to rally if its EV strategy works.

But it’s a big if. Success is not guaranteed. Ford has a lot of work to do. The decline in Ford stock appears to be the result of investors understanding this key fact.

Disclaimer: As of this writing, Vince Martin does not have any position in the securities mentioned.


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