Ford Stock Needs Robust Chinese Growth And Fed Tightening For A TurnAround

  • Ford had a bumper Q4 2015 in China and the momentum has flowed into January. Can it continue?
  • Margins are expected to drop under 10% in North America in 2016. Investors are worried about rising costs.
  • Lincoln has great potential in China. Can the brand develop the right products for its clientele?
  • Ford ticks the boxes with respect to a value play despite its debt load and growing receivables metric in its asset column.

Ford Motor (NYSE:F) stock is down over 17% year to date as negative global macroeconomic conditions will always adversely affect this stock (which is what we have seen so far this year). With the president of the federal reserve bank (William Dudley) coming out recently with dovish comments, this doesn't auger well for Ford's prospects in the US especially considering that sales have never been better in this market. Nevertheless, strong sales in the US have done nothing for the Ford stock price over the past few years. The stock topped out at just under $18 a share in mid-2014 and is now trading below $12 a share. The market, it would appear, has priced in a cyclical top in the US in the near term which is why the stock price has failed to gain any traction (North America is by far the auto-manufacturer's biggest market). To offset an expected decline in this market, Ford needs to show growth in some emerging markets. China is the one market that could make this happen for Ford and here is why.

F stock chart

Source: Ford stock price chart by amigobulls.com

Firstly, Asia-Pacific pre-tax profits for 2015 came in at $765 million which was very encouraging compared to the 2014 number of $172 million. Furthermore, momentum is definitely on Ford's side as the fourth quarter contributed almost 60% of the annual take with pre-tax profits of $444 million (see below). The surge in profits at the back end of the year was down to seasonality but also a recently issued tax credit issued by the Chinese government (which is expected to run at least to the end of 2016). Tax credits and deep discounts don't necessarily make a market (as Ford has seen since 2012) so to see auto sales in China growing by 4.7% last year illustrates to me that there is plenty of strength still present in this economy. Moreover, momentum has followed on from the fourth quarter with Ford recently announcing a 36% spike in its January sales in China. Some analysts are putting this again down to seasonality (as China's Lunar new year fell in February this year) so next month's sales in the region will be key. If momentum can continue, the market may finally take more interest in Ford which should put a floor under the Ford stock price.

50

Although Ford achieved margins of 10.2% in North America in 2015, guidance for 2016 is lower at about 9.5%. The market took this as a topping sign and shares have been selling off as a result since the guidance was announced. There is no getting away from the fact that Ford needs to keep spending at elevated levels in order to boost output and develop new models. $600 million alone was needed to seal the UAW contract and these costs along with Ford's high debt levels are keeping a good majority of would-be investors on the sidelines. So, even though China is a much smaller market, revenue-wise, as compared to the US, how can it offset some of these rising costs? Well, an advantage the automaker definitely has is its Lincoln brand which surprisingly is seen by many Chinese people as a superior product to Volkswagen's Audi range.

Ford is actively strengthening its Lincoln range as it will be launching its 2017 Lincoln Continental shortly (recently unveiled) and also updating current models. The reason why this premium product range is so important is because of the higher realized margins automakers make from luxury cars. In fact, last year luxury car sales only amounted to 10% of total auto sales in the US but this seemingly paltry figure made up almost half of the profits. Lincoln now has 33 dealerships in the country (10 more than originally forecasted) and with the new MKZ  sedan and Lincoln Continental expected to be on sale later this year in China, I'm expecting margins to remain elevated going forward. Ford knows that price mix is imperative so expect new variations and price points within this division in an attempt to appeal to as many Chinese customers as possible

Finally, even though the story of 2015 was pre-tax income of $10.8 billion ($9.3 billion in North America), cautious investors are watching costs and more specifically how the balance sheet is holding up. "Receivables" now makes up almost half of the company's assets which is fine in an economic expansion cycle but risky when we have an economic contraction. Why? Well, just because customers are on the hook for almost $100 billion doesn't mean the capital will be paid back. This is why Ford desperately needs a tightening cycle in the US (sign of economic growth) so lending can continue to increase and people can stay in jobs. When I research potential value plays, I go through earnings, valuation multiples, dividend security and debt. Ford passes on all metrics except its debt in my opinion. In fact, only $27 billion was available in equity at the end of the third quarter of 2015. Charge-offs at the company may be low now but anything could happen if the Fed needs to reverse course on its interest rate policy over the next few quarters.

To sum up, Ford stock is wide open to macro events despite having sound fundamentals. Investors are cautious due to rising costs, downward movement in the stock price despite reporting record numbers and debt. China is a key market for Ford and one which is currently providing the momentum. As the Chinese new year falls in February this year, it will be interesting to see how many units are sold so we can get a proper gauge of the real momentum which is taking place in this market at the moment.

Show Full Article
5 2
Is this article helpful ?    


Author's Disclosures & Disclaimers:
  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
Amigobulls Disclosures & Disclaimers:

This post has been submitted by an independent external contributor. This author may or may not hold any positions in the stocks discussed. Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. Amigobulls has not verified the author’s positions in the stocks discussed, and does not provide any guarantees in this regard. The author may be paid by Amigobulls for this contribution, under the paid contributors program. However, Amigobulls does not guarantee the authenticity or accuracy of the information provided by the author in this post.

The author may not be a qualified investment advisor. The opinions stated in the post should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Amigobulls does not have any business relationship with any of the companies covered in this post. This post represents the views of the author/contributor and may not reflect the views of Amigobulls.

show more

Comments on this article and F stock

Do share this awesome post