American automobile companies seem to have everything going against them these days: A slow growing world economy, deleveraging consumers, and now hurricane Sandy ravaging one of the largest US automobile markets. A report published by Edmund's today estimates that the storm will drive October sales down by 30,000.
That can explain why Ford (F) and General Motors (GM) are trading lower, though both companies reported better than expected profits earlier in the week-in spite of the adverse economic conditions, especially in Europe. What should investors do?
They should use any weakness to accumulate the stocks, especially Ford. For beginners, unusual events like storms and hurricanes have only a temporary effect on the economy; and sales lost when they hit the economy are made up in the aftermath. When it comes to Ford, however, the reasons to buy the stock are far more compelling than a sales bounce back from the hurricane. It is a matter of fundamentals. After years of restructuring the company has become lean and mean again, redesigning its R&D process, close factories in Europe, and luring consumers away from low-profit to high profit models.
First, with improving quality and the introduction of new models, Ford has been benefiting from the flip-flops of Toyota Motor Corporation (TM). The company has further expanded its overseas presence, especially in China, where it is the largest foreign company; it is also expected to benefit from the backlash of the territorial disputes between Japan and China. Reflecting these improving fundamentals, the company has already been beating analyst estimates.
Second, the company is seeing improving financial fundamentals. Ford was the only American automobile company that didn't receive government money during the 2008 crisis. And with $23.79 billion cash ($6.29 per share) at hand and $11.25 billion in operating cash flow, the company is in good position to survive even in a recession - far better than General Motors Company (GM), which is still in business with government support. Last year, both S&P and Fitch raised Ford's credit rating.
Ford Motor Company
Quarterly Revenue Growth
Quarterly earnings growth
Operating cash flow
*Fye Dec 30, 2013; Source: Yahoo.Finance.com
Third, Ford Motor Company has been very aggressive in addressing its European market woes by idling factories, cutting thousands of jobs, and taking a $3 billion charge over the next two years. And fourth, Ford, together with the auto industry as a whole, could benefit from a correction in the prices of raw material, such as copper and steel.
Bottom line: Investors should look beyond Hurricane Sandy and the recession in Europe. If Ford can be profitable under these circumstances, one can imagine what would happen should the economy improve.