For the last few years, the Auto industry has been an interesting pocket of the stock market to pay attention to. Trade tensions between the U.S. and its largest trading partners from tariffs imposed by the U.S. kept a lot of pressure on the entire industry leading into 2020, when the global COVID pandemic shuttered economic activity and collapsed demand for most of that year. 2021 saw a number of Auto companies show significant improvements in demand, and therefore in their bottom lines, which helped a lot of those stocks see impressive increases in price of 100% or more.
2022 has set a bit of a different tone. Inflation and its resulting impact on interest rates started the uncertainty wagon rolling for the broad market, with geopolitical tensions adding to the mix in the last couple of weeks as Russia threatened to invade Ukraine, and then followed through on those threats last week. For automakers, the conflict represents a significant expansion of risk, as many of those companies have critical operations, either in Ukraine or Russia to make their products available in that part of the world. News over the weekend indicates that in many of those cases, production has necessarily been suspended, either because of the risk the conflict will impact those facilities directly, or as automakers have moved to follow the lead of their home countries who moved quickly to impose restrictive economic sanctions on Russia.
For some investors, automotive stocks may seem like a risky place to put their money in the current geopolitical climate; and I think it’s true that if you’re willing to make an investment in this space, you have to be willing to accept that the prices of most of the stocks in the industry are likely to remain under pressure, at least while the current situation in Ukraine remains in flux. The industry is down more than -15% late November as measured by the NASDAQ Global Auto Index Fund (CARZ), with a major portion of that drop coming in just the last couple of weeks. If the industry is under so much pressure, and there doesn’t seem to be much relief in sight in the near future, why not stay away from the industry altogether?
To be an effective value investor, I’ve found that you have to be willing to move against the grain of the broad market; to me, that means that when everybody else says “stay away” from a certain industry the smarter thing is to actually go ahead and take a long look. If you want to find some of the best bargains in the marketplace at any given time, you’re going to be more likely to find them in deeply discounted stocks in depressed industries. That’s one of the biggest reasons that current market conditions led me to take a deep dive to start this week on Ford Motor Company (F).
F is a company that has held my interest for some time; they were the only U.S. automaker that didn’t participate in the federal bailout of the industry in 2008, choosing instead to stand or fall on their own merits. The onset pandemic forced F, along with most of the industry to suspend its dividend payments, but the company also set itself apart from its industry brethren by being the first to reinstate their dividend payout in November of last year. Despite the challenges associated with the last two years, the company also boasts a strong balance sheet and improving profit margins.
Those are the positives. Among the risk elements I see includes exposure in Eastern Europe, and Russia most particularly; it operates three assembly plants in Russia as part of a joint venture with Russian Sollers. While other automakers with significant operations, like Renault and Volkswagen have halted production for the time being, U.S. competitors like GM have far less exposure to the region. GM, for example ended its own production operations in Russia seven years ago and ended a joint venture in the region in 2019. F, however has only said that it was monitoring the situation and would follow any laws on trade sanctions. The stock is also down about -33% from its 52-week peak seen in mid-January at around $26 per share. Does the stock’s current momentum, considered against the company’s fundamental strength, mean that it could offer an interesting value-driven opportunity right now? Let’s find out.
Fundamental and Value Profile
Ford Motor Company is a global automotive and mobility company. The Company’s business includes designing, manufacturing, marketing, and servicing a full line of Ford cars, trucks, and sport utility vehicles (SUVs), as well as Lincoln luxury vehicles. The Company operates in four segments: Automotive, Financial Services, Ford Smart Mobility LLC, and Central Treasury Operations. The Automotive segment primarily includes the sale of Ford and Lincoln brand vehicles, service parts, and accessories across the world. The Financial Services segment primarily includes its vehicle-related financing and leasing activities at Ford Motor Credit Company LLC. Ford Smart Mobility LLC is a subsidiary formed to design, build, grow, and invest in emerging mobility services. The Central Treasury Operations segment is primarily engaged in decision making for investments, risk management activities, and providing financing for the Automotive segment. F’s current market cap is $70.3 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased by -23.5% while sales grew 4.72%. In the last quarter, earnings were -49% lower while sales increased by 5.6%. The earnings trend reflects a multiyear pattern that has prompted management to transform its entire business to focus its production efforts on SUVs, crossover vehicles and pickup trucks (the one notably exception in sedans is the Mustang), and to move 40% of its business into the emerging EV segment by 2030. The company operates with a historically narrow margin profile that has seen margins improve significantly over the last year; on a trailing twelve-month basis, Net Income was 13.15% of Revenues, and strengthened even more to 32.6% in the last quarter.
Free Cash Flow: F’s free cash flow is quite healthy, at more than $9.5 billion over the last twelve months. That translates to a Free Cash Flow Yield of 13%; however it would also be noted that Free Cash Flow has declined steadily over the past twelve months, from $23.9 billion a year ago, to $15 billion in the quarter following, and $10.8 billion two quarters ago.
Debt to Equity: F has a debt/equity ratio of 1.82. High debt/equity ratios aren’t unusual for automotive stocks, however it should be noted that F’s debt/equity is the highest among U.S. automakers. It is also worth pointing out that the lion’s share of their $88.4 billion in long-term debt is attributable to the Ford Credit financing arm of their business; if you subtract this number, their total debt is only about $20.4 billion, while their balance also shows $49.5 billion in cash and liquid assets.
Dividend: F pays an annual dividend of $.40 per share, which translates to a yield of 2,24% per year.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $15 per share. That means that F is overvalued by about -17% from its current price, with a useful discount at around $12 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s upward trend from May of 2021 to its high, reached in mid-January around $26 per share; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. From the peak, the stock has picked up significant bearish momentum, driving below the 61.8% retracement line last week before stabilizing to start this week at around $17 per share to mark current support. Immediate resistance is at around $18.50 based on pivot high activity in early part of February, and marked by the 50% retracement line. A push above $18.50 should see near-term upside to about $20 before finding next resistance around the 38.2% retracement line. A drop below the 61.8% retracement line a little below $17 could have downside to between $15.50 and $15, based on pivots seen in October, June and May of last year.
Near-term Keys: The strength of the stock’s current bearish momentum placing any kind of short-term bullish trade on F extremely speculative right now; the only signal that a short-term trader should look for to justify any kind of momentum or swing-based trade with call options, or by buying the stock is a rally and push above $18.50 per share. A break below $17 would mark a good signal to short the stock or work with put options, with $15.50 to $15 offering a practical exit target on a bearish trade. Despite its underlying fundamental strengths, however, F doesn’t offer a useful value proposition right now.