Since the near financial collapse of 2008/2009, automobile companies have seen significant rallies in share prices. One of the best performers since January 2009 has been Ford Motor Company (F). Ford shares have appreciated by an astonishing 498%. This is significantly better than the broader market (SPY), which has only appreciated by 93% over that same period. But instead of being excited about that, investors should thank their lucky starts and realize that now is the time to get out. Below are 3 reasons why investors should move rapidly to sell their existing long shares and / or initiate a short position.
Reason #1: Fundamental
On a fundamental basis, Ford simply isn't what it used to be. Ford's last annual statement was a complete disaster and sent the shares plunging. We can start by looking at Ford's balance sheet. The first concern was Ford's cash pile dropping (year over year) by 8.7% to $15.66 billion. At the same time, the company's total debt increased by approximately 5% to $105.06 billion. In addition to the increased debt, Ford's payables and accrued liabilities also increased. So in summary, the company's cash decreased and the amount owed increased. That doesn't sound like a promising combination.
Now if we switch gears and analyze the income statement, we will also see some discouraging signs. For 2012, the company generated $126.6 billion in revenue, a drop of 1.25% from 2011. Additionally, the company's net income fell dramatically from 2011. Below are Ford's annual net income numbers for the past 3 years:
- 2012: $5.66 billion
- 2011: $20.2 billion
- 2010: $6.56 billion
So as we can see, Ford's net income came in significantly lower than both of the previous years, despite an improving economy.
Most recently, the company reported its first quarter earnings of 2013. While they were certainly an improvement over the 2012 annual report, earnings were still a disappointment. The balance sheet once again showed a trend of decreasing cash and increasing debt. Since the end of 2012, cash available decreased by 11.7% to $13.82 billion. Ford's debt increased by $2.35 billion to $107.35 billion.
The income statement was a little better. Revenues for the first quarter 2013 came in at $33.86 billion, an increase of $3.3 billion from the same period a year ago. The net income also improved by $220 million to $1.61 billion. However, one concern on the statement of cash flows is that the company's operating cash flow was only $211 million, compared to $2.1 billion for the first quarter of 2012.
So while the revenues would appear to give investors hope, the analysts disagree. While the expectation is for a 20% growth rate during the current quarter, the prediction is for a decline of 17.5% in the third quarter and a decline of just under 1% for the fourth quarter. These projections are especially disappointing given that each projection is less than the industry average.
Reason #2: Technical
In addition to the poor fundamentals and analyst estimates, the technical picture presents another compelling reason to sell Ford. Let's take a look at both a 5-year chart, a 1-year chart, and a 2-year chart of Ford.
Let's start by looking at the first 2 charts, representing the 5-year and 1-year periods. The 5-year chart is what will probably catch investors' attention. Ford shares have appreciated by nearly 500% since the low in early 2009. This rally can be attributed, in part, to the government bailout package for the auto industry. For those lucky investors who were able to buy in at the low, the returns have been impressive. And again, the 1-year chart is also impressive. During the past 52 weeks, Ford shares have appreciated by nearly 40%. Over this same period, the S&P Depository Receipts hasn't even returned 30%. So yes, Ford has had a great run.
But, and this is a big but, the 2-year chart should give investors pause. If we calculate the return over the past 2 years, Ford has only returned 1.1%. Over this same 2-year period, SPY has returned 24.5%. So essentially, the share price increase over the past 52-weeks was just a recovery to where the shares were trading 2 years ago. Investors could have achieved significantly better returns in almost any other stock over that same 2-year period.
Reason #3: Lack Of Rechargeable Car Sales
One of the hottest areas in automobile sales is electric cars. This is a very competitive area, with Tesla (TSLA) recently demonstrating its supremacy when it reported its first quarter earnings. In the earnings report, Tesla announced that it sold 4,900 of its Model S sedans. This sales figure made the Model S the top selling rechargeable car during the first quarter 2013 in North America. It surpassed the following leading automobile companies:
- General Motors (GM) sold 4,421 Volt plug-in hybrids
- Nissan Motor (OTCPK:NSANY) sold 3,695 Leaf vehicles
What's troubling is that the Ford Focus Electric wasn't even mentioned. Even more concerning is that we can go back to total annual sales for 2012 of electric cars and Ford still doesn't make the list. The top 3 selling electric vehicles for 2012 were the Chevrolet Volt (owned by General Motors), the Toyota (TM) Prius Plug-In, and the Nissan Leaf.
With electric cars starting to gain momentum, it's troubling that Ford is well behind the curve. In a recent interview with Bloomberg, Tesla CEO, Elon Musk, revealed that he expects to release a 3rd generation model of its electric car for half the price in the next 3 to 4 years. Ford is going to have a lot of difficulty trying to compete against that model given that the company is already so far behind.
Given that Ford shares are at their 2-year peak with declining fundamentals and an inability to compete in the increasingly popular electric rechargeable vehicle space, investors may want to think strongly about either exiting their long position or initiating a short. Ford was once a great company but it certainly appears that its glory days are behind it.