3 Reasons To Avoid Ford
With new cases of the coronavirus spiking in the US and worldwide .
With the already historic unemployment levels and job losses in recent months .
And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.
There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.
The key to continue compounding your investments and build wealth is to keep investing well over time.
Most people think the number one way to do that is to invest in assets that will grow your capital over time.
And this is huge part of things.
But another huge part of this is also losing as little capital as possible.
The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.
Both things are necessary to build wealth. But most only think of investing well.
Today I want to talk about the second part of things that few consider… Staying away from investments where you’ve got a high probability of losing money in.
3 Reasons To Avoid Ford Stock
- It’s The Most Indebted Major Car Manufacturer
As a percentage of its balance sheet, Ford (F) is the most indebted of the 4 major “traditional” car manufacturers in the US.
As of the most recent quarter its balance sheet is made up of 88.8% of total liabilities. And its debt to equity ratio is 3.89.
I want to invest in safe stocks that will be around for decades to come to help me build wealth over the long term. This helps insure I lose as little money as possible over time.
Typically, this means I invest in companies that have little to no debt compared to their cash and equity.
Ford has the opposite problem – in too much debt on an individual basis. But also, when compared to its competitors.
- General Motors (GM) balance sheet is 83.5% total liabilities and its debt to equity ratio is 2.03.
- Fiat Chrysler (FCAU) balance sheet is 72.3% total liabilities and its debt to equity ratio is 0.3.
- And Toyota (TM) balance sheet is 61.4% in total liabilities and its debt to equity ratio is 0.53.
Ford is the most indebted company of the 4 major traditional major car manufacturers. And this makes it enormously risky.
But there’s another reason to stay away from its stock.
- It’s Not Producing Enough Profits and Cash Flow
In the most recent quarterly data Ford was unprofitable on a net income basis. And it produced below average free cash flow.
These both due to increased costs related to the coronavirus. And a massive slowdown in new and used car sales due to the coronavirus and mass unemployment nationwide.
I’ll detail this more below…
Its net income profitability margin in the trailing twelve months (TTM) period was negative 2.1%. And its free cash flow to sales (FCF/Sales) margin in this same time was 3.9%.
EDITOR’s NOTE – Trailing twelve months just means the last 12 months consecutively.
Generally, you want these numbers to be as high as possible on the positive side because that means the company is generating profits and cash flow from its operations.
But net income is negative in the last 12 months. And its FCF/Sales is below my minimum threshold of 5% that I look for to invest in a stock.
- As a comparison GM’s net income profitability margin in the TTM period is negative 3.5%. And its FCF/Sales margin was negative 4.8%
- FCAU’s net income profitability margin in the TTM period is 4.1%. And its FCF/Sales margin was 5.2%.
- And Toyota’s net income profitability margin in the TTM period is 6.9%. And its FCF/Sales margin is 0%.
These shows the entire industry getting hammered in the last 12 months. But that Ford is struggling arguably the worst due in large part to its high debt load.
And there’s still one more reason to avoid Ford’s stock in the coming months.
- Uncertainty Related To The Coronavirus
This all circles back to the beginning and the coronavirus.
Air travel, hotels, and restaurants are still getting hammered.
But so are many other industries worldwide. And car manufacturing and selling is one of those.
Car sales have now fallen drastically nationwide in the 1st two quarters of 2020 as this pandemic began raging.
Sales fell 12.7% in the 1st quarter of 2020 compared to the 1st quarter of 2019.
And 34.3% in the 2nd quarter in the year to year period.
This is industry wide.
Ford sales were down 33.9% in the 2nd quarter compared to the prior year period. And its sales for “daily rental” – think to companies like Hertz and other car rental companies – were down 94%. And “other” commercial fleet sales were down 78%.
Another problem related to car sales and the ongoing crisis is the data that just came out of China…
Last week China released it latest car sales data and they’re still down 6.5% from this time last year.
China is months ahead of us in terms of controlling the virus and its auto sales are still negative.
This means US focused car companies are in for months longer of negative sales numbers.
And this means Ford is in the worst shape due to its large debt load.
Unfortunately, there’s even more bad news for Ford and the other car companies when it comes to the coronavirus.
Because tens of millions of people are unemployed nationwide, they’re getting farther and farther behind on their bills.
This includes car loan payments.
The chart above shows the percentage of auto loans more than 90 days delinquent.
As of May 2020, we’re now sitting at an estimated 5.1% auto loan delinquency rate. Meaning for every 100 vehicles loans, 5 are now 90 or more days without being paid.
And much of those payments are financed directly by the car companies loan departments.
This means lower revenue, profits, and cash flow from this part of its business for the foreseeable future as well.
No new data is out as of this writing which makes this info almost 2 months old. And this means the delinquency numbers are guaranteed to be even higher now due to the continued mass unemployment.
For all the reasons talked about above car companies are in massive trouble.
And with Ford already having the highest debt load and lowest margins this will negatively affect them more than its competitors.
I recommend you stay far away from this entire industry for the time being for the reasons above. But especially stay away from Ford.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.