As one of the largest automobile manufacturers in the world, Ford Motor (F) generates well over $100 billion in annual revenues and sports a market cap of $96 billion. I am neutral on Ford stock.
Truly a global company, Ford generates about half of its revenues from international markets. Interestingly, the company sells very few cars anymore. Based on December 2021 sales, trucks represented 53% of sales results, SUVs were 44%, and cars were only about 3% of vehicle sales.
Despite selling four million vehicles annually at decent margins around the world, all investors seem to want to talk about is their electric vehicles. In December 2021, Ford sold 173,740 vehicles, of which only 7% were EVs.
The company claims they are now the second-largest EV automaker, after Tesla (TSLA). In a Bloomberg interview in December, the Ford CEO stated that the company hopes to be producing 600,000 EVs at an annual run-rate basis by 2024. F has also pledged that by 2030, 40% of vehicles sold will be electric.
Will Electric Vehicles Save Automakers?The car industry is a notoriously cyclical industry where during recessions, car sales precipitously decline and most automakers report substantial losses.
In the 2008 recession and market crash, the Big Three U.S. automakers asked for $50 billion to pay for health care expenses and avoid bankruptcy and further layoffs. This led to substantial loans by the U.S. government.
In December 2008, a bailout had been arranged totaling $17.4 billion to be distributed in January and February of 2009. In early 2009, the chances of bankruptcy by General Motors and Chrysler continued to look inevitable as new financial information about the scale of the 2008 losses came in.
Ford itself was not as damaged as much as the other automakers. However, it still suffered greatly as by the fourth quarter of 2008, it reported a loss of nearly $6 billion, and the annual total loss came to $14.6 billion.
That year, Ford's revenue declined almost 20%, and its cash reserves declined by $21 billion. The stock price retreated to around $2.00 per share.
In the Dot.com crash of 2000 and the subsequent recession in the following years, F stock declined approximately 80%.
When the next real recession hits (not a very brief COVID-19 recession), it won't make a difference if you're selling electric cars, internal combustion engine cars, or cars that run on bacon grease – people aren't going to buy autos. Every automaker will suffer as they have for 100 years when things get tough. Auto companies with particularly high price points (think Tesla) will suffer at disproportionally higher rates.
Balance Sheet and DividendAs of the third quarter of 2021, Ford had $46 billion in cash and over $144.5 billion in debt. The company's liquidity position is strong currently if you take Ford's financing arm, Ford Credit, out of the equation (Ford Credit makes up most of Ford's debt). If a recession hits in the near term, Ford itself should survive and maybe thrive, but the effect on its stock price is a different story altogether.
The current annual dividend is $0.40 which equates to a dividend yield of 1.65%. With analyst estimates approaching $2.00 for 2021 and 2022, the forward payout ratio remains low at 20%.
Wall Street's TakeTurning to Wall Street, F has a Moderate Buy consensus rating based on 11 Buys, five Holds, and three Sell ratings assigned in the past three months. At $21.28, the average Ford Motor price target implies 12.5% downside potential.
ConclusionI am neutral on F stock as I believe its recent successful financial accomplishments and record auto sales are admirable. Still, with the stock near all-time highs, future gains will be hard to come by, particularly when the next recession hits.
Ford is one of my favorite companies of all time with its quality products, rich history, and conservative approach to operations that is almost reminiscent of a family business.
However, this economic and market craziness won't last forever. For a company that has survived through the Great Depression and been through numerous economic recessions – it should know this already.
If Ford management is reading this, I implore them to raise equity capital at these crazy high prices and reduce all forms of debt, including at Ford Credit. When the next recession hits, it will be a doozy, and electric vehicles won't save the company.
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Disclosure: At the time of publication, Tom Kerr did not own shares of any stocks mentioned above.
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