Ford Is Up 38.9% Since July 13th – Is It A Buy?

Back in the Summer I wrote two separate articles telling you to avoid investing in Ford…

Today, I want to give you an update on them and answer – Ford Is Up 38.9% Since July 13th – Is It A Buy? 

You can read the past articles in full by using the links above…

But if you don’t want to; here’s a quick recap of what I said back in the Summer about it…

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From Article #1 Linked Above

  1. 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.

  • 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.

2. 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 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.

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%.

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.

3. Uncertainty Related To The Coronavirus

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%.

And this means Ford is in the worst shape due to its large debt load.

Unfortunately, there’s worse 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.

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.

***

From Article #2 Linked Above

Since the original post on Ford a couple weeks ago things have continued getting worse for the company and the entire car industry.

On August 4th, 2020 Ford fired its CEO Jim Hackett after he became CEO on May 22nd, 2017.

Why?

Because in his reign the stock was down 39% overall.  And got crushed in terms of performance compared to the S&P 500 index as you can see in the chart below via MarketWatch.

What this chart shows is that since Jim Hackett came on board Ford stock has trailed the performance of the overall S&P 500 index by almost 100%.

It lagged the market so much because of Ford’s continued decline in market share, revenue, profits, and cash flow production… These are all down since he took over.

This worsened when the coronavirus hit, and its profitability went negative.

I detailed much of this above and what it led to in the previous article, but this is still ongoing.

On August 6th, 2020 Toyota released its latest quarterly earnings report and they were a horror show.

Vehicle sales fell 50% to 1.16 million total vehicles sold.

Operating profits fell 98% in the year-to-year period.

Net profit fell 74.3% in the year-to-year period.

And Toyota said it expects its full year net profit to fall by 64%.

This isn’t just bad… Its catastrophic.

Vehicle manufacturers, sellers, and dealerships operate on super small margins in good times due to the enormous amount of competition.

In bad times like we’re dealing with now; these far lower sales are leading the entire industry toward unprofitability.

To make things worse for Ford, Toyota is the best run and most profitable car manufacturer in the world.

And if you’re still not convinced Nissan warned of a full year a $6.4 billion net loss.  And Honda reported a net loss in the quarter.

If better run companies like Toyota, Nissan, and Honda are having these kinds of problems; imagine the problems Ford is going to have in the coming months as one of the worst run, least profitable, and most indebted major vehicle manufacturers.

Continue avoiding this entire sector for the reasons mentioned above.

But especially avoid Ford because it’s getting hurt worse than most other banks.

***

This thesis to avoid Ford stock continued to play out since I last wrote you about it back in early August… Sort of.

  • Revenue is still way down… 16% from $156 billion in the full year 2019 to $131 billion in the trailing twelve months (TTM) period.
  • Its still unprofitable on an operating income and net income basis.  And the only reason its profitable on a free cash flow basis is because it issued a whopping $66.2 billion of debt in the TTM period.
  • And it still has far too much debt at $175.23 billion as of October 29th.

Debt that makes it one of the top 10 most indebted companies in the world.

This is all bad of course… But why did I say sort of above?

Because since July 13th when I first told you to avoid it to today its stocks gone up 38.9%.

Why has its stock gone up so much while numbers are still horrible?

Speculation and the general rise of the market in this time.

As of this writing, the market is back to hitting new all-time highs on an almost every other day basis on hopes the various Covid vaccines will get us back to some kind of normal soon.

This even in the face of the economic news getting worse as I’ve told you about several times in the last few weeks.

The rise in the market while lockdowns are reimposed, and the economy crumbles makes no sense.

And the rise in Ford shares while this happens makes even less sense.

Especially when you consider its numbers are still horrible… Performance and numbers that are so bad it led the Ford board of directors to fire its CEO back in August.

And all this is happening with new Covid cases exploding and daily death tolls in the thousands per day in the US.

None of this makes sense.

And this speculation will end badly.

For the reasons in this article – and those in the previous ones – I continue recommending you avoid Ford stock.

Because its 38.9% rise since July with continued horrible numbers leading to the firing of its CEO makes zero sense.

Click here to see some of the stocks we recommend to Depression Proof Your Portfolio.

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.

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