In the last few years, Ford (NYSE:F) has had a meteoric recovery after it was able to spurn a US sponsored rescue plan, retool the company internally, and turn the company around. So what every investor wants to know now is whether it still has room to grow. We don’t have a crystal ball, so we can’t give investors a conclusive outcome, but what we can say is that we like Ford (NYSE:F). The firm has truly illustrated why it deserves to be around today, will continue growing, and that when push comes to shove, it can still can come out victorious even in the middle of a global economic collapse.
So everything you should be perfect, right? Wrong. While we think the company is great, we also need to account for the fact that it’s a cyclical and a consumer good. This is what’s holding us back from being more bullish on the firm overall. In our view, Ford is a great company, but we rate it a “pass” because the company is cyclical in nature, depends on its strong exposure to the US consumer market for success, and the fact that buying a new car is often more of “want” rather than a need in our view.
Still Too Early in the US Cycle
A general rule of thumb is that the stock market recovery precedes the economic recovery by 6-12 months. Some argue that we’ve already gone through a good part of our latest bull market, but that really depends on perspective. From a stock market perspective, we think it’s safe to say we’ve hit that mark in some form or another, but from an economic perspective, we would disagree. This is what brings us to our current dilemma. Essentially, all the easy money has been made in the same period with Ford, and the future of the US economy isn’t overly compelling.
In our view, consumers remain vigilant to not overextend themselves and this has illustrated itself in the form of a slow US recovery. While Ford does fall into the Consumer Goods sector, we need to remember this isn’t your standard expense. In addition, we expect to see increased competition from Honda (NYSE:HMC) and Toyota (NYSE: TM) with increasing gas prices. Not to mention buying a car is a lot different than buying brand name clothes and or splurging during seasonal retail periods. At this point we feel that the US remains constrained by bottom line consumers and that the speed of the US cycle will remain too slow to sufficiently propel Ford justifiably higher.
Want and Need Are To Very Different Things
In some ways, it’s hilarious to think how interchangeable the ideas of “want” and “need” are relative to the mindset of the consumer. If the US economy is doing great, consumers believe that they need new clothes, new homes, new cars, and the list goes on. The one difference here is that cars, like homes, actually entail more money than face value illustrates. Buying a car generally entails taking on a multi-year payment plan for at least a couple hundred dollars a month on the low end. Thus buying a car entails a lot more psychological weight, and at this point, we don’t see consumers feeling confident enough with US economy to be buying cars en masse.
With the US unemployment rate remaining high at 9.2%, we see the consumer base at large viewing cars as a want item not a need item. In addition, consumers often defer buying new cars when the domestic economy isn’t doing great. Cars can always be used longer, repaired or bought used to avoid taking on the added liability of new car payments.
Can you really blame consumers either? We sure can’t, and unfortunately, while we see Ford numbers doing well, we just don’t see them having a high probability of beating top-line expectations.
It’s tough to rate Ford a “pass” when we like the company, but at the same time, overlooking US market exposure would be a naïve move. With a weak US economy, consumers will likely continue driving cars longer before getting a new ones. Most importantly, the US economy currently lacks strong momentum ,and with Ford being a cyclical company, we have to put added weight to this.
Now an investor could buy the stock and just wait it out, but the problem we see is that the “wait time” is tough to even guess at. In our view, it’s better to wait and see the US picking up some steam and then reviewing the firm again. Finally, perhaps with a different type of cyclical, we would be more inclined to take the “waiting” road, but with Ford, we just don’t think it’s worth the risk at this time.