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Forget Ford (F), Invest in These Auto Companies Instead (Revised)

Rimmi Singhi

Ford F is traversing rough waters, as is evident from its share price decline of 39.6% over the past five years against the industry’s 24% rally. Weighed by ebbing sales and weak financials, the firm has lost more than 6% in the past six months against the industry and sector’s increase of 27.7% and 10.8%, respectively.

Six-Month Price Performance

Increasing competition, dim prospects, declining market share in key markets served and weaker demand in the auto sector could push this Zacks Rank #4 (Sell) stock further into the red territory.

While the auto sector has certainly being weighed down by economic slowdown, tighter emission standards and high demand in ride-sharing services, there are some companies in the sector that appear promising despite the headwinds. However, before proceeding to them, let’s take a closer look at the factors ailing Ford.

Factors Plaguing Ford

Ford has been in a downward spiral since hitting highs in 2014, following the exit of the firm’s legendary CEO Alan Mulally. His leadership rejuvenated the firm, enabled it to avoid bankruptcy, and helped restore the brand’s reputation among consumers and investors. However, ever since Mulally stepped down in 2014, the company’s efforts to strengthen product lineup and prospects have not yielded desired results.

Ford has been seeing soft sales for a while now amid macro-economic headwinds and industrial challenges. The company’s total vehicle sales in the United States declined 3% year over year to 2,422,698 units in 2019. Ford’s sales in China, which happens to be its second-biggest market, fell for the third consecutive year, by 26.1%, amid lackluster economy and the long-standing U.S.-Sino trade tiff. The company expects these challenges to prevail this year as well. With the recent coronavirus outbreak set to further affect China’s economy, prospects of the firm in the country are becoming even more forbidding.

The company’s margins in international markets are declining. Slowdown in the economy and the discontinuation of Sedan models have lowered vehicle sales and dented margins in South Africa, China, the Middle East, and Africa. Increased cost of raw materials and tariff woes may put pressure on the firm’s profitability. Ford anticipates adjusted 2019 EPS in the range of $1.20-$1.32. The figure was recorded at $1.30 a year ago.

The company recently announced that it expects to be hit by a pre-tax loss of about $2.2 billion in fourth-quarter 2019, due to pension and other post-retirement employee benefits (OPEB) obligations. The $2.2-billion loss is projected to reduce Ford's net income by around $1.7 billion, after taxes.

Ford’s efforts to expand into new markets and diversify offerings seem to be failing. As it is, the company lags its peers when it comes to innovation. The expected downturn in the auto industry is likely to make matters worse for the firm. 

Possible spike in oil prices amid geopolitical tensions in the Middle East and the OPEC+ output cut agreement is likely to put further pressure on the firm, thereby negatively affecting Ford’s biggest profit generator, F-150. The fuel guzzler F-150 has been America’s hot-selling pickup for around 40 years. The already expensive vehicle may get pricier, considering the expected volatility of oil prices in the future. To add to that, increasing number of EV alternatives may pose a serious threat to the F-150 in the coming years, making the vehicle unaffordable and unattractive even for the Ford loyalists.

Ford’s weak financials are already playing as spoilsports. The company’s debt-to-equity ratio is around 4.3, which is almost double of that of its closest rival General Motors GM. The company carries a leverage of more than 80% and a huge proportion of its profits go away to debt holders rather than its shareholders. Although Ford has always emphasized on its commitment toward dividend payment and displays an impressive yield of 6.9%, its stretched balance sheet and dim prospects raise concerns about the sustainability of its payouts.

Considering the automaker’s high capital budget and $11-billion restricting program to revive the company, its near-term financials are likely to get strained further. In September 2019, Ford’s debt rating was downgraded to junk status by Moody’s on worries of weak financial outlook, while the firm embarked on its $11-billion restructuring program. S&P ratings followed suit and downgraded Ford’s debt to BBB-.The rating agency said that another downgrade for Ford is unlikely, unless the risk of U.S. recession heightens and the firm’s profitability in Europe and China declines. While the risks seem to be coming to fruition, any further downgrade by S&P ratings could spell disaster for Ford. As the company is already grappling with huge debt amid its ambitious restricting plan, an inability to borrow money upon any further rating downgrade may be the final nail in the coffin.

Is There Any Bright Spot in the Auto Sector?

Indeed, the auto sector appears to be rather gloomy, as is evident from its Sector Rank #13 out of a total of 16 sectors. Automakers around the globe have been struggling with declining car sales. Stricter emission woes, and shift toward electric and autonomous vehicles have changed the sector’s dynamics. Widespread usage of technology and rapid digitization resulted in fundamental restructuring of the automotive market. Technological complications call for high-priced aftersales services, which may create opportunities and challenges for auto equipment manufacturers.

While there are various underperformers like Ford, not all auto players have been losing ground. A few have managed to maintain a firm footing on the back of effective strategies, cost-containment efforts, and focus on innovation, product launches and diversification. These strategies have been aiding them to counter the sector’s weakness effectively. That said, let’s take a look at some of the bright spots in the industry for investors to bet on.

4 Auto Stocks to Park in Your Portfolio

We have highlighted four stocks from the Auto space, which carry a solid Zacks Rank and hold substantial growth potential.

Tesla, Inc. TSLA is undoubtedly a solid bet, carrying a Zacks Rank #2 (Buy). This EV pioneer has doubled in the past three months and is poised to maintain its bull run on the back of high deliveries of Model 3, progress of the Shanghai Gigafactory, along with an amazing line up of new models. Tesla’s earnings are expected to grow 6,462.5% year over year in 2020.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Gentex Corporation GNTX is another worthwhile option, carrying a Zacks Rank #2. Strong product launches, unique technology platforms and aggressive capital-deployment strategy bode well for the automotive supplier. Gentex’s earnings are expected to grow 7.3% year over year in 2020.

Investors can count on BMW AG BAMXF, which sports a Zacks Rank #1. The firm’s impressive product portfolio, strategic collaborations, and continued efforts to adapt to the electric and autonomous era are commendable. BMW’s earnings are expected to grow 16.2% year over year in 2020.

Blue Bird Corporation BLBD is also a promising pick, carrying a Zacks Rank #2. The company, which designs, engineers, manufactures and sells school buses and related parts, is benefiting from an environment-friendly trend. Focus on shifting its product mix to alternative-fuel buses is likely to boost prospects of the firm. Blue Bird’s earnings are expected to grow 25.5% year over year in 2020.

(We are reissuing this article to correct a mistake. The original article, issued earlier today, should no longer be relied upon.)

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