Ford Motor (NYSE:F) stock hasn’t seen these levels since the 2009 financial crisis. But this drop has not just been about the sudden implosion in the markets. Keep in mind that F stock has been in a steady decline since 2015, when the shares were at close to $16. Now they are at $4.50.
So what’s next?
Is Ford going to continue to drop? Well, for the most part, there are certainly positives. Let’s face it, the valuation is at dirt-cheap levels. Consider that the stock is currently at a mere 0.17 times sales. It seems that Wall Street has thrown in the towel on this one.
But of course, Ford also has an assortment of iconic brands. And with gas prices falling, this will be an advantage. This may even help dealing with electric vehicles from operators like Tesla (NASDAQ:TSLA). Ford also has $34.7 billion in the bank.
Yet despite all this, I still think it’s better for investors to avoid F stock. Here’s why.
The Major Issues
The biggest risk is a recession, which seems like a foregone conclusion. The latest forecast from the UCLA Anderson School already indicates that this has happened because of the coronavirus from China. It calls for a 6.5% decline in the Q2 and a 1.9% drop in Q3, with a subsequent recovery of 4% growth at the end of the year.
No doubt, this will severely impact auto sales, which are highly sensitive to economic cycles. In fact, this time may be even more severe as there is a general fear across the U.S. To put things into perspective, look what happened in China. Last month, auto sales dropped by a grueling 79%.
Now, companies like Ford and GM (NYSE:GM) are already taking steps to deal with this, such as offering cut-rate financing and other promotions. There’s even buzz that the U.S. government may institute programs, similar to what it did in the 2009 recession with the “Cash for Clunkers” program.
But such moves will likely only have a marginal impact. In the meantime, auto makers must also deal with disruptions with their supply chains. For example, Ford had to shutdown its Valencia plant in Spain because three employees tested positive for Covid-19. The facility is one of the largest outside the U.S. as it can produce 450,000 vehicles per year.
Bottom Line on F Stock
Falling sales are not the only problem for Ford. One of its most lucrative businesses — auto financing — could be vulnerable (during the last quarter, this unit contributed a hefty $3 billion in profits). Rising defaults could put even more pressure on the bottom. And then there are the pension liabilities. With interest rates at 0% and the markets in disarray, it will be even much harder for Ford to meet its obligations.
As a result, the dividend yield on F stock, which is currently at 10.7%, could be cut. There may even be pressures to pare back on longer-term investment opportunities, such as for autonomous cars and EVs. Such moves could mean that Ford will fall further behind in these important growth categories.
Now this does not imply that the company could go bust. For the most part, Ford should be able to survive this. Again, there is enough cash to withstand a harsh downturn. But unfortunately, there will still be lasting effects. This will make it tough for F stock to get out of its rut.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.