November Sales Are Over-hyped
- A spike in the consumer price index in October to 1.6% will lead to rising interest rates. This is not good for Ford's borrowers.
- Apart from low-interest rates, Ford has been making excellent margins on its trucks due to low gas prices which will not remain low.
- The combination of a pending recession in the US along with Ford not possessing any competitive advantages is bearish for Ford stock.
Ford's (NYSE:F) decision to take on more long-term debt could be a sign of things to come for the auto manufacturer. The company is borrowing $2 billion making it the first time the company will be accessing the debt market in 4 years. Currently, Ford's debt to equity ratio is 2.86 so this will obviously increase once more debt is added on the books. I have stated in my previous commentary that Ford will want it's electrified and autonomous technology to pay off in the near term.
The company has already bet big by stating that it will have a fully autonomous vehicle on the road by 2021. The fresh capital from the debt drawdown will be used to specifically invest in electrified and autonomous technology. However, when you compare Ford to the likes of Toyota Motor Corp (NYSE:TM), the Japanese automaker has far less debt on its balance sheet allowing it to compete over a longer period of time until new technologies become mainstream. Ford needs more of a quick roll out of electric and autonomous vehicles whereas its competition doesn't. This isn't the only problem Ford is facing going forward, which is why investors (especially dividend investors) need to pay attention. (Also Read: Is Europe The Key To Success For Ford Motor Company?)
November Sales Were Misleading
With relation to the November numbers, investors have to read between the lines to a certain extent. First of all, November of this year contained two extra sales days compared to 2015 and heavy incentives were also the order of the day this year. These advantages led to a 3.6% increase in volume sales which lifted Ford's sales above the sector's seasonally adjusted annualized selling rate of 17.83 million (1.8% decline YoY). However, there are a few areas here (despite the elevated incentives) which I believe are temporary. Personally, I believe the Lincoln lineup and the F-series pickup trucks cannot keep growing at these growth rates. The divisions grew at 19 & 10% respectively which in my opinion is down to both new models ( MKZ & Continental Sedans along with the Super Duty) and cheap gas. These divisions (due to cost) are driving earnings at present but I believe that there is a lot of "fat" to come off these divisions which will result in much lower earnings than what is being generated at present.
Higher Inflation Will Lead To Higher Interest Rates
However, the elephant in the room is inflation which is definitely on the rise. In fact, inflation has increased from 0.8% in August to 1.6% last month which has to be a worrying sign for automakers. The Fed will definitely raise the interest rates this month but I don't think its efforts will be enough to offset the spike in inflation. Rising interest rates have always been crippling for the auto industry for two reasons. One is that cars and trucks will now cost more to manufacture and secondly borrowers will have to pay much more on their loans going forward. Moreover, borrowers are already maxed out on their auto loans both in terms of duration (the average term is now over 72 months) and budget (average loan draw-down is now $30k+). (Also Read: Should You Buy Ford Motor Company Going Into 2017?)
US Is Expected To Undergo A Recession In The Near Term
Thirdly, the US is long overdue a recession. Cheap money and zero interest rates have fueled the so-called recovery we have had since the great recession. However, all good things come to an end and rising inflation seems to be the first sign that harder times are on the way. To add insult to injury, Donald trump is warnings companies like Ford not to offshore their manufacturing or an import tax will be imposed. Mexican manufacturing (see chart) will continue, I believe that can't be good for an already struggling economy. This is the last thing Ford needs as its industry enters a brand new down-cycle. Furthermore, Ford does not have distinct competitive advantages (over its competition) which is why there is nothing to protect the stock from collapsing.
To sum up, although November's US sales were impressive, I believe they were generated on the back of incentives and product launches. Inflation is rearing its ugly head. Higher interest rates have always adversely affected Ford's sales. I believe this time will be no different.
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