Still See Downside Risk In Ford Motor Company Stock

  • Ford Motor company Stock is down around $5 a share since 2011. Many investors are underwater and will sell once their investments come back into the black.
  • Record earnings both this year and last plus the initiation of a "special dividend" haven't been able to move the stock price.
  • Imagine what would happen to the stock if the company reported a couple of earnings misses or poor guidance?

Ford Motor Company's (NYSE:F) sales bounced back in April (SAAR of 17.4 million) and what stood out to me was the 3% hike in retail sales which was the best performance in this division since 2006. The F-series truck lineup continued to perform very strongly and the explorer crossover brand grew a whopping 22% which resulted in April being a record month for many models. Nevertheless, the stock gave back all of its earnings gains (where it announced a bottom line of $2.45 billion for the first quarter) when it announced it would be recalling 200,000 trucks and SUV's in order to repair technical problems. Therefore, Ford stock is trading basically flat for the month of May which is nothing new for Ford stock. In fact, I doubt if the stock would still be trading 3% higher than current levels if the recall announcement had not been announced. Ford stock just hasn't been able to gain any traction with the market since 2010 and I can't see an inflection point in the near term.
F stock chart

Source: Ford Stock Price Chart by

This little exercise will give you an idea of the returns an investor would have made if he or she invested capital back in January 2011. Now Ford's current quarterly dividend is $0.15 per share plus the company initiated a special dividend of $0.4 in January of this year. Now if $20,000 was invested back in January of 2011, this capital would have turned into (assuming all dividends were re-invested) $18.425. Even with Ford's current 4.45% yield along with its new special dividend (which brings the yield to well over 6%), the investor in question would have lost money.

Investors will be aware that oil prices have risen sharply since February and if this continues, it could trigger the top of this auto cycle. Strong dividends are only attractive when the company's or sector's fundamentals are sound. I believe the market is sniffing out a cycle top here which is why Ford is finding it so difficult in getting upward movement in its stock. Remember most investors who invested over the last five years are currently holding a paper loss which leads me to believe that if they get a chance to sell, a lot of them will take it with both hands.

Furthermore, if you are an investor waiting for recent "record earnings" to move the stock, just have a look at past numbers. At the end of 2011, Ford stock was trading at almost $11 and the company reported earnings per share of $4.94 which equated to net income of $20.23 billion. Furthermore, although restructuring was involved, debt levels were lower than present levels and operating margins were a full 2 basis points higher. My point here is that although Ford may look cheap from a valuation perspective, it has traded at these earnings multiples before for a considerable period of time before the stock began to move up. The same could easily happen again despite earnings growth estimates of $2.09 per share in 2016.

Nevertheless, what definitely has the potential to move the stock going forward would be a clear statement that the company intends to go after Tesla (NSDQ:TSLA) with a long range (200 miles) electric car of its own. In fact, Ford CEO Mark Fields stated that up to $4.5 billion would be invested in this area right up to 2020 and that 40% of all models would be electrified by that date.

However, the CEO fell short in stating that his company would have a 200 mile model in the near term which would compete head on against Tesla's model 3 and General Motors (NYSE:GM) bolt models. Electric cars definitely could become a growth trigger for the stock but Ford needs to act quickly here. First movers always hold the advantage in bull markets and even if Ford delivers a long range electric model by 2020, it will still be way down the pecking order of long range electrified vehicles. Investors should watch this space because as things stand, Ford even if it launches its Model E within 3 years, it will probably be the fourth automaker to launch a 200 mile model. I will be looking at its competitors to see how their stock reacts when their new long range electric models go live.

To sum up, Ford stock is still struggling despite another bumper quarter. I still maintain it is risky to just invest in this stock for the dividend. Many investors that have been holding Ford over the last 5 years are still underwater on their investments which leads me to believe that selling would be elevated if the stock caught a bid. Electric and China remain key despite earnings over $400 million in Europe this quarter. The market still isn't buying into Ford's growth story which is why investors should be cautious in the event of poor guidance being announced for some upcoming quarters.

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  • 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.
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