- Ford motor's August sales numbers were disappointing.
- The auto sector may have peaked, and sales in the remaining part of 2016 may remain sluggish.
- With a slowdown already priced in and strong dividend yield, Ford stock is a long term buy.
Yesterday was not a particularly good day for stocks of US automakers. On one hand, Tesla Motors Inc. (NASDAQ:TSLA), which is having a lot of trouble of late (read SolarCity deal and production miss) saw its stock slide more than 5.3%, just managing to close above the psychologically important $200 mark, after a SpaceX Falcon 9 rocket exploded at a test firing in Florida. On the other hand, the August auto sales numbers came out. And the numbers were not good, especially for Ford (NYSE:F). The Detroit-based auto manufacturer said in a statement that US sales were down 8.4% YoY in the month of August compared to a 3% decline in July sales.
While the decline in the sales numbers was expected, the decline was a bit higher than expected. As a result, the stock price fell by 1.3% and closed the last trading session (Sep 1) at $12.44. Despite the disappointing sales data, the long-term story remains strong.
Auto Sales May Have Peaked
The August sales data indicates that the US auto demand may have plateaued, if not declining. The best days of the auto makers, when the pent up demand from the recession saw the auto sales soaring and the industry outperforming the market, may be well behind them. To be fair, in its Q2 2016 earnings call Ford had warned about the plateauing of demand in the 2nd half of 2016, but it still expects the sales to be around last year's record levels.
According to Reuters, the US auto sales may have declined by 4% in August. August auto sales stood at 1.51 million or 16.98 million vehicles at seasonally adjusted annualized rate (SAAR). This was against a SAAR of 17.88 million in July. And this slow down has been reflected in Ford’s inventory levels which rose to 81 days of supply Vs 61 days of supply last year.
The slow down in the industry is likely to hurt the bottom lines of the auto manufacturers, including Ford, who will have to increase their incentive and control productions to move the sales and reduce inventory levels.
Sub Prime Auto Loans
Another factor that may impact the auto industry is a brewing subprime crisis in the auto loan industry. While there is a wide disagreement about the systemic importance of this sector, and whether or not the collapse of this sector will have a similar impact as the mortgage sub-prime crisis, it is definitely not going to be good for the industry which is already slowing down. There is increasing evidence that that the delinquencies are rising quickly in the sub prime auto loans. And if the Fed goes ahead with a rate hike in September, the rising interest rates will result in higher delinquencies. However, an improving job market may soften the blow.
Ford Became The Most Shorted Stock On NYSE
The trials and tribulations of the company have not been missed by the bears. For the period ending 15th August, Ford stock was the most shorted stock. The number of shorted stocks jumped by 13.3 million to 161.3 million shares or 4.3% of the total float, with days to cover jumping to 4 days. The rising short interest is likely to put near term pressure on the stock.
Long Term Growth Prospects Remain Good
However, Ford's long term story remains strong. The company has been investing in new models and technologies. Ford became the first one to announce a target date for rolling out an autonomous car, in the process breaking out from the crowded self-driving car space. In an announcement made a couple of weeks ago, Ford said that it will launch a fully autonomous commercial car by 2021. The potential for self-driven cars is huge, with Bloomberg estimating that the industry will reach a size of $42 billion by 2025. Ford expects volatility in auto sales to continue. However, sales are expected to remain strong. The company is likely to give a more detailed forecast during its investors day presentation later this month. Analysts expect ford to grow its earnings at a CAGR of 8.95% over the next five years.
Ford Has Strong Fundamentals
Ford's fundamentals are strong. The company generates billion of dollars in cash flows every quarter. In the latest quarter, the company generated more than $7 billion in operating cash flows. The number while likely to come down in the next quarter will still remain huge. Also, Ford has a large hoard of cash and cash equivalents, which came in at $39 billion in the latest quarter. To put things in perspective, Ford's market cap is around $49 billion. The huge cash flows allow the company to pay generous dividends. Ford stock is currently yielding an attractive 4.85%, double the S&P average.
The last two months have not been strong for Ford motors. And there are headwinds from a slowing auto sector. However, Ford stock remains a fundamentally strong company with strong cash flows and profits and the company comes at an attractive valuation of 6.07 PE (ttm). The slow down in sales has already been priced in. Average analyst estimate of $13.65 indicates an upside of 10% in the next one year, and if you add the yield of 4.85%, the total return will exceed 14.5%. Ford stock is a buy on dips, especially for income investors.