Don't Buy Into The Hype Around Ford Motor Company (F) Stock

Ford's U-turn on Mexico may not help the stock. Here's why it's more prudent to stay away from Ford stock for now.

Despite Ford (NYSE:F) stating that the decision to cull its proposed manufacturing plant in Mexico was an internal decision and not a patriotic one, Donald Trump (who won't take office until the 20th) already feels he has a victory under his belt. The President-elect hasn't stopped with Ford either. He has been on GM's tail, in an effort to bring as much production as possible back to US soil during his presidency term. This begs the question on whether Ford and its peers will end up answering its shareholders, or the government? As a shareholder, you would hope it is the former, but due to its huge reliance on US sales, Ford may be at a disadvantage here, which may give Trump some leeway. Here's why you shouldn't get lured by the hype around Ford stock.

December Sales Were A One-Off Due To Recent Launches & Lucrative End Of Year Incentives

In fact, the company's December numbers were very impressive, but I maintain that a lot of this growth has been generated as a result of a plethora of launches over the past few years. The Edge crossover & the Expedition SUV drove growth in the SUV segment. F-series pickups (led by the recently launched Super Duty & the F-150) posted a record-breaking quarter which hasn't been surpassed for over a decade. Apart from Ford's light truck growth, investors would have noticed the SARS (Seasonally Adjusted Annualized Selling Rate) came in at a robust 18.38 million in December. This means that 2016 sales on average rose to 17.54 million, which was another consecutive growth year for the industry. However, cyclical tops always end in euphoria which we can see in the sentiment chart below. Yes, the stock may look cheap with its present price to earnings ratio of 6.28, but meaningful risks remain in my opinion. (See Also: Is Ford Motor Company (F) Becoming A Trump Stock?)

 

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Ford's Margins Will Be Ultimately Suppressed By Manufacturing In The US

The company's present debt to equity ratio is 2.86, which is substantially higher than that of Toyota Motor Corp (NYSE: TM) or General Motors (NYSE: GM). In fact, even if one does conclude that Ford is an attractive play at present, its debt levels turn that argument on its head. Many income orientated investors focus on its large dividend and healthy price to cash flow ratio of 2.8 but there is more than meets the eye here. Why? Well, we were already informed that the company would be undertaking heavy investment over the next few years - especially in the areas of electric and autonomous vehicles. In fact, the pending $700 million investment which has been earmarked for Michigan is projected to take these two specific areas under its wing. What tax breaks will Ford receive for taking this decision? Will it able to compete with the likes of Toyota, which is a far more diversified company, with only a third of its sales coming from North American markets? This is the kind of information investors need to look at.

Also Read: Don't Get Lured By Dead Cat Bounce In Ford Motor Company (F) Stock

Massive Amounts Of Leased Cars To Enter The Used Market Shortly

Furthermore, Ford has already stated that there will be a huge number of leased cars returning to dealerships over the next few years, which will undoubtedly put pressure on used car prices. Zero percent interest rates in the US over the past several years resulted in more than 30% of new cars being leased, which is unprecedented. New car and truck sales will definitely get hit if used car prices undergo significant downward pressure with regards to pricing. Ford's management will state that a substantial tax cut (for manufacturing in the US) would aid in combating rising demand for second-hand vehicles but the numbers here are unprecedented. The chart below highlights the huge levels of leased cars that have been on the road since 2012. These now are coming off lease and going to create huge headaches for Ford in the near term. By dropping this pile-up of used cars into a rising interest rate environment, it seems clear to me that Ford's record sales numbers will soon come to an end.

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Summary

Since Donald Trump was voted in as President-Elect, optimism has really grown in Ford. However, I believe that it is unwarranted. Unless Trump can create an economy where US citizens only buy US auto brands, I believe Ford will continue to be up against it, especially while competing against companies with stronger balance sheets. The returning "off-lease" cars are also a worry. I wouldn't be buying into the hype here.

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Jack Foley Jack Foley   on Amigobulls :
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  • I do not have any business relationship with the companies mentioned in this post.
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