With Ford (NYSE:F) not paying a dividend and facing plenty of uncertainty, many investors are wondering why they should consider buying F stock. The shares are still down 46% this year, as the automaker desperately attempts to work through this tough economic patch.
Unfortunately, automotive stocks never really recovered from the 2008 financial crisis. Some will argue that Ford’s shares sank to $1 during the crisis and subsequently rebounded 800%. That is technically true, but it’s been a long time since Ford’s shares were thriving. Although the company has posted record profits and sales in recent years, the shares have failed to gain traction.
Over the last decade, F stock is down more than 57%.The shares are down 46% over the last 15 years and 82% over the last 20 years. While Ford narrowly avoided bankruptcy in the Great Recession — unlike General Motors (NYSE:GM) — Ford has had anything but a solid ride.
A Deeper Look at F Stock
Here’s the problem with automotive companies. Their stocks are cyclical, meaning they are supposed to do well when the economy is thriving and do poorly when the economy turns south.
However, despite a strong economic backdrop. their stocks have not been doing well for years, stagnating in a sideways-to-lower pattern. It got to the point that many investors bought Ford and GM only for their dividends, taking any stock-price appreciation as a bonus.
Now though, the novel coronavirus has thrown a wrench into the stocks.
The economy is not meant to slam on the brakes, nor are the automakers’ business models. Building cars is a labor-intensive, low-margin business with a ton of fixed costs. In essence, the business model of the automakers is the complete opposite of companies like Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT).
With the economy grinding to a halt, auto sales are obviously suffering. As a result, the cash flow, revenue and profit of Ford has tumbled, straining its balance sheet.
JPMorgan’s analysts recently slashed their earnings estimates for Ford. They now expect the company to lose 65 cents per share in fiscal 2020, down from a profit of $1.05 per share in 2019. They trimmed their 2021 EPS estimate to $1.00 per share from $1.05 per share, although it’s obviously way too early to know how the company’s business will perform next year.
On the plus side, it doesn’t seem like investors have to worry about bankruptcy at the moment. Ford suspended its dividend payment and drew down all of its $15.4 billion in credit to weather the storm. The additional funds and the dividend suspension should help get it through this situation.
Trading Ford Stock
Just because F stock may survive, though, doesn’t necessarily make it a buy. Its biggest selling point to investors was its dividend, which is gone for the time being. The company is facing plenty of uncertainty and has little to no revenue. I’d rather buy high-quality assets like Facebook or Nvidia (NASDAQ:NVDA) at a discount than buy bargain-basement stocks like Ford and then have to keep my fingers crossed.
Even using JPMorgan’s 2021 earnings estimate leaves F stock trading at 5.8 times its 2021 earnings. That’s not really that out of line with the normal valuation of the sector, which often trades with a single-digit P/E ratio.
As for the charts, I wanted to look at the monthly chart to examine how poorly this stock has performed over the years. It’s worth noting that this chart is adjusted for dividends.
The stock fell below $6 which had been its support, while $4 held strong. If F stock had fallen below $4, it could have been a slippery slope for F stock.
For now, I expect $6 to act as resistance. If the shares exceed that level, they could reach their shorter-term moving averages, like their 10-month and 20-month moving averages.
However, on the above chart, look at the shares’ downtrend resistance (depicted by the blue line), which formed in 2015 and has been guiding F stock lower for years. Ford’s business is currently under significant pressure due to the coronavirus, but its troubles did not begin in February 2020. Consider that before deciding whether to buy Ford’s shares.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.