Ford Stock Is a Neutral Play in 2020
Challenging industry conditions weigh on the bullish narrative
The trailing year has been challenging for Ford Motor Company (NYSE:F) and that’s reflected in the company’s stock price. Ford stock trades at almost the same level as it was in January 2019. While there are positives to talk about, I believe that headwinds are likely to dominate headlines in 2020. I therefore remain neutral on Ford stock but would consider gradual exposure if the stock trades around $8.
The vehicle sales outlook for 2020 is the first reason to believe that the year will be challenging for Ford. According to AGL, the analytics subsidiary of TrueCar (NASDAQ:TRUE), light vehicle sales for 2020 will likely come in around 16.9 million units. This implies a decline of 0.8% as compared to 2019.
For China, vehicle sales are projected to decline by 2% for 2020 to 25.3 million units. The impact of coronavirus on GDP growth and consumer confidence is still to be discounted in these numbers. Even on a consolidated global basis, vehicle sales are expected to decline for the third consecutive year. Therefore, conditions will remain challenging for the industry and Ford will feel the impact.
A Crucial Year in China
For 2019, Ford reported a decline in sales of 26.1% as compared to 2018. As a broad market trend, Japanese and German brands have “weathered the slowdown better than local and American ones.”
As challenging conditions sustain, 2020 to 2023 are the most crucial years for Ford in China. In particular, the year 2020 will dictate the likely trend.
To elaborate, Ford will be launching 30 new models in China over the next three years. This is possibly the last attempt to revive sales and gain market share. It is also important to mention that one third of the models will be electric cars.
There is no doubt that China’s electric vehicle market has potential in the long-term. But the market is already over-crowded and Ford’s strategy remains to be seen. Additionally, new energy vehicle sales declined by 4% in 2019 due to subsidy cuts.
With a weak macro-economic environment and high level of competition, Ford has a big challenge ahead. Ford is bullish on China for 2020 and 2021 in terms of cutting losses. However, if China’s sales fail to revive in 2020, Ford stock can potentially trend lower.
Trucks Will Continue to Drive Cash Flows
Even amidst challenges and losses in China, Ford reported operating cash flow of $14.7 billion for the first nine months of 2019.
The key cash flow driver for Ford is the company’s robust truck sales in the U.S. For fourth-quarter 2019, Ford reported 15.9% growth in truck sales on a year-on-year basis. Sales growth was driven by the F-Series coupled with the Ranger.
Back in 2018, Morgan Stanley analyst Adam Jonas estimated that F-Series sales were responsible for 90% of Ford’s global profits. The scenario is no different in 2020. Truck sales have provided the company with cash flow cover as it continues to invest in China.
Even for 2020, I believe that F-Series sales will remain strong as the trend is sharply shifting in favor of pick-ups in the U.S. Car sales for Ford slumped by 41% in Q4 2019, with truck sales surging by 15.9% for the same period.
My Final Views on Ford Stock
Ford stock remaining sideways in the trailing year is an indication of the markets being in a “wait and watch” mode. Truck sales in the U.S. will continue to impress, coupled with commercial vehicle sales in Europe.
However, Ford’s plans for China and its impact on growth will trigger stock movement. I am afraid that it’s likely to be a difficult year considering the broad industry outlook. Therefore, it makes sense to stay on the sidelines.
If China’s growth plans do work, there will be opportunities in the coming quarters to consider exposure to Ford stock.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.