Ford Stock Has Plenty Of Downside Risk

  • Debt levels are rising in Ford plus most of the asset in its asset column is made up of loans. Would they be safe in a recession?
  • December's robust sales is not the metric to go by as huge capital was put to work by Ford in order to lure buyers before year end.
  • Dividend investors need to stay on top of the pay-out ratio and cash flow levels.
  • Ford's consensus for 2016 looks too optimistic especially when you consider the inventory levels in Automobile sector.

The US stock market continues to fall with S&P futures presently trading at 1,945. Ford stock is down over 8% since the turn of the year with the stock currently trading around $12.75 a share. I would caution investors against going long on Ford stock at these levels. The dividend looks particularly attractive at 4.58% but warning signs are appearing that could make Ford stock a value trap.

Value investors straight away will be attracted to Ford's current valuation and furthermore the momentum it achieved in 2015. Price to book ratios and price to sales ratios ( 1.9 & 0.4) haven't been cheaper over the last five years. Moreover Ford has a forward price to earnings ratio of 5.8 which is 3 times lower that the S&P 500 (INDEX:SPAL). Both the top and bottom lines rose robustly in 2015 but Ford stock didn't follow suit - dropping of 8.8% over the 12 months.
F stock chart

Source: Ford Stock Price Data by

This is where value investors see the value in Ford stock. The stock has dropped amidst rising earnings per share. Ford missed expectations (despite producing meaningful gains over Q3-2014) last quarter and the market punished the stock by sending it lower. The one outlier that doesn't make this a pure value play in my opinion is the company's debt levels. Ford's balance sheet shows that its short term and long term debt levels are rising meaningfully (now make up around $120 billion) and although its asset column is also rising, the vast majority of it is made up of rising receivables ($92 billion presently owed to the company).

Apart from the debt risk Ford faces, the macro picture is not looking all that healthy either. US auto domestic sales SAAR in December came in at 13.46 mn which was the lowest print in 6 months. The issue here is not the decline but the magnitude of the collapse as sales came in a huge 0.69 mn lower than expectations.

If this trend continues, I feel there is not much to stop it as inventories are at recession type levels presently which means there would be no scope left to manufacture. End result? Jobs being lost in manufacturing (which are good high paying jobs) which is not what Ford needs right now. Furthermore if the inventory to sales ratio continues to increase, you are going to see many sectors being adversely affected such as suppliers, sales staff, banks, etc. Sub prime loans in the auto industry has spiked over the last few years and now it seems obvious when you see the diverge between inventory levels and actual auto sales.

Secondly the chart below shows that there is still plenty of room to the downside for Ford stock. In fact, Ford stock has been unable to make higher high since mid 2014 which is a worrying sign. We may get some buying into weakness shortly as RSI levels are getting oversold but it will be brief if numbers in the US continue to slide.

Furthermore I wouldn't pay much attention to Ford's very impressive December numbers where sales rose by 8% making it the best December in many years. The auto-maker offered extra discounts on top of the current incentives in order to lure people in to make a purchase before years end. This extra spend on promotion resulted in utilities and trucks increasing 13% each but car sales fell more than 4%.

Investors should remember that these discounts are gone now, they stopped on the 4th of January. Furthermore where many bullish analysts are talking about the hike in sales in December, few are discussing how the winter spending spree will affect margins and I think it will be worse that many think when Ford announces on the 28th of January.


Its unbelievable how investors forget the past with respect to price performance. I have already discussed here why I believe Ford stock doesn't have the fundamentals to justify being a long term hold. Ford stock fell off a cliff in 2008 which is why I don't understand why bullish investors are ignoring the downside risks here.

Dividend investors have to be wary of the pay-out ratio which currently is fine (although increasing sharply) at 48% and cash flow levels which are growing and are currently at $8.7 billion. However these metrics can change in a heartbeat especially if the company doesn't beat analysts expectations.

The consensus for 2016 is an EPS of 1.92 on revenues of just less than $146 billion. These numbers look very optimistic to me when you consider inventory levels and its debt levels. We have already seen how Mr market punished stocks in this sector that don't meet the guidance. If you are a dividend investor, watch the metrics I have mentioned above. You don't want to end up in a situation where the dividend has been cut and you're holding the stock that is heading south at a rate of knots..

To sum up, owning this stock primarily for the dividend is the wrong course of action in my opinion. Ford's debt levels are worrying and macro factors are also not helping when you take inventory levels into consideration. Many bullish investors are looking at 2015 and believing the company's momentum will continue into 2016. I don't buy it. Pay close attention if you are a dividend investor. Maybe inserting a stop loss at around $11 a share would be prudent action as the dividend under that price would not be safe in my opinion.

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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Comments on this article and F stock

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Ford is an image of american pride. Ford will never go out of business. I do hope it goes back down to $1.83 per share like in 2008 or maybe even sub dollar. if it does go down to around 1 dollar and you don't buy you will be angry at yourself for years. I do not currently own or trade any for stock, but I cant pass up a good discount :). Happy investing
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Oh any my opinion is FORD will Crash Hard very soon! I hope that you are not too heavily invested. If I owned Ford stock now I would sell it all and put it all in AMD stock Advanced micro devices. Like ford they have been in Business for a long time and historically bottom out and when they release a product that surpasses Intel they sky rocket earnings and stock value jumps over ten times in value. I would then take all the money out of AMD and hold it until ford bottoms out and put half of what I made in AMD in FORD ( I.E five times the $$ Value I withdrew at about 10 times the discount so if I had X1000 shares of ford before I would now have x5+x10 = 50,000 Shares). The other 50K cash I would hold in my trade account until I see what the market is doing. Perhaps Intel will release a better chip and AMD will drop again preparing for another rise. Although I may just invest the whole 50K in Exxon mobil or CVX Chevron because this oil crunch will kill a lot of little companies and only the big Petrolium players will be left in the end which will make the price go up (supply+demand) and at that point you can sell the exxon or cvx stock because these little petro companies will be reopened under exxon or cvx and bring back high production paring both big corps against eachother and the cycle will continue. Just remember if you are not good at mathematics and you cannot look at the economies of the world and see what is happening then please don't lose it all and find another hobby or just don't ever invest in a potential high roller (Gamble) stock. Get a stable multi billion company with dividend stock at a discount while there are discounts in the market.
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