Ford: Built Tough Against Near-Term Headwinds (NYSE:F)


Like most car companies, Ford (NYSE:F) has been having a tough time during the coronavirus pandemic. The lockdown and subsequent stay-at-home orders have dampened consumer confidence and halted automobile sales. However, the company is an American icon with a fantastic product and a loyal following. Despite the current short-term difficulty, I believe the company still has a solid, long-term future.

The company is facing some serious short-term headwinds because of the capital and fixed-cost-intensive nature of the business. Ford reported Q1 2020 net loss of $2.0 billion. Even more concerning is this net loss corresponded with a first-quarter free cash flow of negative $2.2 billion. In order to raise cash, the company tapped around $15 billion from its credit lines, issued an additional $8 billion in debt, and suspended its dividend. The company ended Q1 with $35 billion in cash.

The preliminary results for Q2 do not look promising either as total vehicle sales were down 33.3%. This is really bad news for the company as, like all automobile manufacturers, Ford’s margins are incredibly tight. Despite having $155.9 billion in sales, the company only has a 13.6% gross margin. Given the high fixed costs, a small decrease in sales would lead to a large decrease in the bottom line.

A possible silver lining though is that retail sales were only down 14.3% and retail sales for trucks were practically flat. The bulk of the loss can be attributed to the lack of industrial fleet sales. This is not surprising given that companies were conserving cash due to the pandemic and a lot of these purchases may have been pushed back or canceled. Basically this means that the Q2 2020 results will most likely look much worse than Q1 2020.

Investor presentation

Investor presentation

Ford’s future prospects look a lot better

Despite the present challenges, Ford is prepared to fire on all cylinders through 2020-2022. First and foremost, a new Ford Bronco is set to launch sometime in 2021 (with the unveiling in a few days’ time). The Bronco is a classic brand last seen in 1996. Ford is intending to tap on the nostalgia for the brand by highlighting its classic design such as its iconic horizontal grill. Similar to the Jeep Wrangler, an SUV Ford dedicated to taking on, the Bronco is an off-road-focused SUV. It will be mid-sized 4×4 and be a body-on-frame designed for rough roads. The Bronco will be offered in two- and four-door configurations along with a smaller variant called Bronco Sport.

2021 Ford Bronco: What We Know So Far

2021 Ford Bronco: What We Know So Far

Ford has been very clever in building hype for the reveal of the Bronco by partnering with Disney to get the message across all of its platforms. In fact, the Ford Bronco is among the most anticipated cars in 2020 according to Google search trends. Hype for the Bronco has been building up since this study was done and is close to the highest it’s been in anticipation of the launch. The company seems to have learned its lesson from the failed launch of the Explorer, so I do not expect any issues from this launch.

These Are The Most Googled Upcoming Cars Per State In America | Carscoops

Google Trends

Brian Moody, executive editor at Autotrader.com, said, “Jeep has been capitalizing on their heritage for decades, and not in name only. Jeep has proven that a genuinely capable adventure/utility vehicle with a nod to the past is what many people want. And that’s what the Bronco promises, if they can deliver an authentic product and, more importantly, communicate that authenticity laced with nostalgia, it will be a winner.”

Ford declares war with all-new Bronco as Jeep Wrangler demand spikes

Apart from the upcoming Bronco, Ford has hedged its future in the electric vehicle market. Threatened by upstarts like Tesla (NASDAQ:TSLA) and its Cybertruck, Ford has dedicated itself to building its own electric vehicle using its ever-popular F-150 as the base. The F-150 is the best-selling vehicle in America, and it’s quite clever that Ford used this as a way to introduce its entire EV line-up. This means that for the average truck driver, the design and feel of the electric vehicle version F-150 is far more comfortable than the somewhat weird-looking Cybertruck. Ford is targeting to have this car out by 2022.

Pick-up trucks are the company’s differentiator and its bread and butter. Ford and Lincoln both ranked in the top 5 in J.D. Power 2019 US Initial Quality. Ford pick-up trucks have a brand history built over the years when it comes to power and reliability. Given Tesla’s Model Y production quality issues, I do not view the company as a threat to Ford’s long-term dominance of the market.

The other potential threat to Ford from the EV side is the upcoming Rivian truck which is set to launch sometime in late 2020. However, Ford has hedged being displaced by a possible disruptor by investing $500 million into the car manufacturing start-up. Ford’s Lincoln brand continues to closely work with Rivian using its electric vehicle platform. This partnership allows Ford to have a sort of “hedge” should Rivian become the dominant EV technology.

Watch Ford F-150 all-electric pickup prototype tow over 1 million lbs of train carts – Electrek

Valuation

I feel that Ford is undervalued as the company’s price to book value is close to the lowest it’s been in five years. The current price to book ratio is 0.83x. Automobile manufacturing is a mature industry that is incredibly capital intensive. This deters new entrants from entering the industry and ensuring the incumbents’ dominance in the long term. While the stock has recovered from the lows quite a bit, it has not yet fully recovered from its price of $9.16 at the beginning of the year.

ChartData by YCharts
ChartData by YCharts

Among the big three car manufacturers, Ford also consistently has the highest gross margins. In a capital-intensive industry, having the highest gross profit margin gives you a substantial edge over your competition. However, there is room for improvement as Asian competitors like Toyota (NYSE:TM) and Honda (NYSE:HMC) have gross margins above 15%. Ford’s margin has been declining over the past five years. I feel confident that the company can improve its margins as it is undergoing an $11 billion restructuring plan in order to bring costs down and be more efficient. With the various possible tailwinds the company could have in the future, I believe the company is oversold and a reversion to a price to book value of 1 is probable. The company has a book value per share of $7.46 (which is my near-term target price as well). This implies a 25% upside from the current price levels.

ChartData by YCharts

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in F over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Caveat emptor! (Buyer beware.) Please do your own proper due diligence on any stock directly or indirectly mentioned in this article. You probably should seek advice from a broker or financial adviser before making any investment decisions. I don’t know you or your specific circumstances, therefore, your tolerance and suitability to take risk may differ. This article should be considered general information, and not relied on as a formal investment recommendation.





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Ford: A Cheap Stock With High Liquidity Brings Opportunity (NYSE:F)


We penned an article on Ford (F) back on the 10th of June and stated that the automobile manufacturer could easily revisit its March lows. Due to the aggressive move off those March lows, bullish sentiment was increasing despite the suspension of the dividend. We pointed out however that although shares looked cheap at the time, Ford’s valuation in recent times had consistently underperformed the industry averages. Suffice it to say, there was no guarantee that this time would be any different.

Fast forward three weeks-plus to the present day and Ford shares are more or less trading around the same level ($6.05 per share). In the most recent second quarter, management announced that overall sales fell by approximately 33%. Retail sales however helped matters as this segment only lost 14.3% over the same period of 12 months prior. Another encouraging trend is that Ford’s truck division (by far its biggest segment) dropped the least (26.6%) out of the three divisions with the overall sales number for Q2 coming in at 237,891 units.

Bulls will be hoping the new 2021 F-150 will drive buyers back into this market. If the arrival of America’s best-selling truck coincides with the coronavirus vaccine, we may finally see strong pent-up demand coming to the surface.

Between now and then though, risk definitely persists to the downside. For one, the S&P 500 has been practically on a straight-line rally since its lows in March of this year. When this rally finally comes to a halt, we will most likely see our intermediate cycle decline. For example, if we were to say that the present intermediate cycle in the spiders has already topped (at 3232 on the 8th of June last), a 50% retracement from this level (which would be perfectly normal) would retrace the index back to around the 2700 level. A more modest 38% retracement would bring price back to the 2835 level.

Therefore, what Ford investors need to ask themselves is how their shares will perform when the main indices begin their intermediate declines in earnest.

We actually ran a scan where we looked for stocks with greater market caps than $1 billion, option volume over 100,000, book value under 1 and IV percentile over 50. Ford came out on top of the list.

This may be where the opportunity lies in Ford at present. Since its implied volatility is more than 60% at present, its 52-week IV percentile comes in at around 75%. Considering shares are trading with a book multiple of 0.8 at present and the options market is very liquid, we may be able to use some derivative strategies here in order to gain an edge.

If we look at the daily chart for example, we can see that shares now have strong short-term support between the $5.50 level and the $5 level. Shares spent well over two months trading in this range. Furthermore, price has now formed a daily swing and has broken above the down-cycle trend-line. This may mean we get some reprieve from the recent downturn. If indeed, this turns out to be the case, this may bring opportunity for option premium sellers.

The activeness of trading Ford for us is its liquidity. For example, since we do not want to hold of the shares in here, we could sell something like a put spread where our risk is defined. In fact, because the bid/ask spreads are so tight in this stock, trading put spreads in Ford gives us the opportunity to roll spreads out in time (which is something we rarely do due to extra commissions and lack of liquidity). In Ford´s September cycle for example, we have strike prices available every $0.50 which again brings more possibilities to the table for option traders. The September cycle at present is trading with implied volatility of over 58%. Ford´s 52-week implied volatility low comes in at just 16.4%.

Therefore, to sum up, from an encouraging standpoint, shares of Ford have been building support for multiple months now. In saying this, its implied volatility levels have remained above normal. We are looking at put spreads below support levels to take advantage of this volatility. We will put on this trade shortly.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Ford: Positioned To Benefit From Behavioral Shifts (NYSE:F)


Ford (F) was forced to enter survival mode amid the COVID-19 pandemic. With manufacturing facilities and dealerships being forced to shut down, management suspended Ford’s dividend, drew down on its existing lines of credit, cut the salaries of employees, including its top executives by 50% for at least five months, and raised $8 billion from the corporate debt market by offering bonds with interest rates ranging from 8.5% to 9.625%, which actually saw $40 billion worth of demand from investors. It is clear that management acted prudently to preserve cash and pivot operations to survive for the long term.

Recent Developments

According to the most recent data, the U.S. has passed the peak of new COVID cases and the economy has begun to slowly open back up. Stay at home orders are being lifted and all 50 states have begun to reopen in some way, but there are substantial variations in how states are reopening. It appears the worst is in the rear view mirror for Ford (no pun intended).

Source: NY Times

Re-Opening Plants

Ford has opened back up its U.S. assembly plants and only had a couple of hiccups so far. Ford has taken a number of precautions at these plants, including screening employees’ temperatures, but had to temporarily shut down two separate factories because employees tested positive for COVID-19. Thankfully for the workers and Ford, the stoppages were only brief and the plants were able to re-open quickly after people known to have been in close contact with the infected individuals were notified and asked to self-quarantine for 14 days and the plant underwent a deep clean. These protocols show that Ford may have some temporary shutdowns, but long term, it appears these plants will be able to pump out new vehicles.

Disinfecting Vehicles

During the COVID-19 pandemic, everyone’s worlds have been turned upside down and many usually simple tasks have been much more complicated. For example, people can no longer just carelessly order an Uber for fear that a prior passenger or driver could be a carrier for COVID-19. The police are not immune from this fear as well from criminals. This week, it was widely reported that Ford was able to develop a software update that can raise the interior temperature of police cruises to 133 degrees Fahrenheit for 15 minutes, which they’ve confirmed is sufficient to kill the virus.

Ford Police Interceptor Utility Hybrid AWD Saves Gas - Specs ...

Source: Caranddriver.com

Ford is working on developing software updates on the rest of Ford’s vehicles in the New York police fleet, which is a promising sign for Ford’s brand and for future sales. If Ford is able to bring this technology to all of its other vehicles, this could be a boon for its vehicle sales because those who would like to earn more money by driving for ride sharing would be more inclined to purchase these vehicles and police forces could also prefer these vehicles over other alternatives.

Behavioral Changes and CDC Recommendations

In my last article on Ford, on April 15th, I postulated that many city dwellers would begin an exodus to the suburbs and that public transit use (including ride sharing) would see a large decline. Recent polls have shown that about 40% of those living in cities have been considering fleeing the city and moving to the suburbs. With more companies adopting work from home on a permanent basis, I believe this will be an increasingly more realistic option.

Source: U.S. Census Bureau

As of the last census data collected, from 2010, over 80% of the U.S. population lived in urban areas. If this polling proves out and individuals begin to move away from cities, this would be a boon for car sales as these new suburbanites would need to purchase cars. Moreover, as we enter the first phase of re-opening, the U.S. Centers for Disease Control has issued guidance for businesses to discourage public transit and encouraged them to coax their workers to drive and cover parking expenses. With these recommendations, even workers that continue to commute into, and live in, cities will purchase vehicles to avoid potentially being exposed to COVID-19.

F-150 Sales

Ford debuted its F-150 in 2015 and its F-Series remains the best-selling pickup and vehicle in the U.S. Ford just announced that it will debut its new generation of F-150 cars on June 25th, which will be Ford’s first redesign of its F-150 series since 2015.

Source: Motortrend.com

Importantly, this launch will include a plug-in gasoline hybrid powertrain. In addition to providing better fuel efficiency, this truck will be helpful for construction workers, as it will provide more utility since it will be capable of delivering electricity to saws, drink coolers and other tools. With urbanites seemingly likely to flock to the suburbs, it appears likely that construction of new homes will pick up and this could further bolster demand for Ford’s newly refreshed F-150.

Conclusion

Ford’s stock was decimated by the COVID-19 pandemic and was already trading down from recent years amid its struggles in China. Last month Ford hit a 52-week low of $3.96 per share and has traded a bit up since then, trading currently at $5.71 per share.

Chart

Data by YCharts

Despite coming off a bit from its 52-week low, I believe Ford remains a great value. Ford’s net income last year was only a mere $47 million, so Ford does not look great on a price to earnings basis. However, as I previously noted, Ford’s net income was reduced because of $6 billion in one-time charges, including $3.2 billion of global redesign charges (which included prudently pivoting towards producing more profitable vehicles such as the F-150) and $2.5 billion of pension and OPEB remeasurement losses.

As such, I believe a more accurate measurement of Ford’s current value is to look at its historical price to sales ratio. As you can see from the chart below, Ford is trading at a near all-time low on this ratio.

Chart

Data by YCharts

Ford’s management took many prudent actions to preserve cash and keep Ford positioned to thrive in the post-COVID world. With economies beginning to re-open, I believe Ford will see a boom in sales due to behavioral shifts, including a mass exodus to the suburbs. At this price level, I believe Ford represents an asymmetric risk/reward investing opportunity.

This article was originally published on my exclusive marketplace service, Invest with a Stacked Deck.

Disclosure: I am/we are long F. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Ford Can Weather This Storm (NYSE:F)


Ford Motor Company (F) has endured a tough few years and its business has been severely challenged amid the coronavirus crisis. With dealerships and manufacturing facilities closed, Ford is in survival mode, and investing in a business during such time is a scary proposition. Nevertheless, I believe the risk/reward potential is worth investing in Ford at this level.

Data by YCharts

How Ford Will Survive

Once it became clear that Ford would have to shut down its operations for an indeterminate period of time, management prudently suspended Ford’s dividend, saving the company around $2 billion a year. Additionally, Ford bolstered its already strong balance sheet by borrowing a total of $15.4 billion by drawing on two existing lines of credit. Ford already had $35 billion in liquidity at the end of 2019, so that gives for around $50 billion in liquidity to weather this storm.

More recently, Ford’s CFO also announced it is taking more steps to preserve cash such as lowering operating costs, reducing capital expenditures, and deferring portions of executive salaries. Ford also announced “[they] believe [they] have sufficient cash today to get … through at least the end of the third quarter with no incremental vehicle production and wholesales or financing actions.”

Source: TheStreet

An important portion of this guidance is that Ford announced it believes it has the cash on hand to get through at least the third quarter even if they do not have any sales or additional financing. It does not appear that dealerships around the world will have to stay closed until the end of September, especially given that states and governments around the world are beginning to discuss opening portions of the economy. In fact, on April 15th, Germany announced they will begin to open the economy on Monday. However, it is comforting to know that Ford has the balance sheet to sustain its operations being suspended for a much longer period of time.

Once economies around the world begin to re-open, I believe Ford will be positioned to quickly return to profitability, given its recent moves to streamline its company to become a leaner enterprise and focus on its most profitable vehicles. More on these changes can be found in my prior article here.

Fallen Angels and Government Assistance

Furthermore, in the event Ford’s operations remain completely suspended past the third quarter, I believe Ford could borrow from the markets at reasonable rates. The Federal Reserve announced last week that it will expand its corporate bond buying program to include companies that had investment-grade debt that recently received junk status (a.k.a fallen angels), which includes Ford’s debt. This unprecedented action by the Fed is very positive for Ford since they’ll have support for their debt and it will be cheaper for them to borrow more from the market should the coronavirus crisis extend past the third quarter.

Ford could also see more support from the Federal Government, should they require it, since Michigan (where Ford has a majority of its manufacturing, employing thousands of jobs) is a key swing state, and Trump will surely want to keep these employees and voters happy.

Ride Sharing and City Exodus

The coronavirus has impacted nearly every aspect of life and tremendously altered how people live and work. Currently, citizens are sheltering in place and only going out of their homes for essential services. Car use has surely declined, which is negative for car manufacturers. However, the industry that is more negatively impacted, and I believe will feel lingering effects, is the car sharing industry, specifically Uber (UBER) and Lyft (LYFT). Data published at the end of March showed that Uber rides in the US have fallen by as much as 94%.

Source: Business Insider

Prior to the coronavirus, the sharing economy was surely taking shape. It was becoming common to hop in an Uber Pool and share your commute with many strangers; no one thought twice about hopping in a total stranger’s car. However, taking an Uber at the current moment is viewed as a dangerous proposition and frowned upon. Once the economy starts to slowly re-open, I believe it will take a very long time for the sharing economy to achieve the ubiquity that it once had. Individuals will be scared about what disease lurks in the cars and who rode in that seat before them.

Even if these thought processes go away in a couple of years, prior to it dissipating, individuals will prefer to commute by themselves and will commit to doing so for several years by purchasing cars. Moreover, I believe we will see an exodus to the suburbs from cities. Anecdotally, I have many friends that have been stuck in their apartments over the past month and are eager to move out of the city and head to less congested living places. I believe we will see many people moving out of cities and into the suburbs, which could further spur demand for cars.

Conclusion

Ford’s management has prudently pivoted the company into survival mode and has positioned the company to weather the coronavirus storm. After the coronavirus passes, I believe car manufacturers will see demand return from consumers, and Ford will be positioned to capitalize on this demand. I believe Ford represents an asymmetric risk/reward opportunity.

This article was originally published on my exclusive marketplace service, Invest with a Stacked Deck.

Disclosure: I am/we are long F. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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