Ford Motor Co. (NYSE:F) has been an interesting company to watch. On the one hand, you have a car maker that has displayed real success in turning its business around since 2008. On the other hand, you have a stock that has been unable to gain investor confidence. The Price-to-Earnings is a cheap 10.72.
The auto industry experienced a strong cycle through the last couple of years. In that time, Ford has been able to grow revenue and show positive earnings to shareholders. 2016's net revenue of $151.8 billion represents a 12% increase over a five-year period. But lately, net income is another story.
Ford's 2016 net income of $4.6 billion is a $2.8 billion decline from 2015. A 37.8% drop is not what we want to see. The third quarter had a very disappointing 50% decline in earnings per share of $0.24 vs. $0.48 the year prior. The fourth quarter helped cement disappointing earnings with an adjusted EPS of $0.30 vs. an estimated $0.34. In two years, the stock has fallen 22.65%, which obviously underperforms the market's (S&P 500) 12% growth.
Obviously, the biggest thing affecting automakers are sales trends. The biggest concern for Ford, right now, is the industry slowdown. Through six years, car companies have been dealing with awesome sales growth. Now, there seems to be a plateau forming. The cyclical nature of the industry is to be expected, but one has to wonder how Ford's stock will perform if there is a significant sales dip across the board.
The fact that sales fell even while the number of discounts increased sends a signal that the cycle is shifting. Even more convincing is the overall trend that the Big 3 experienced sales declines in January. While Ford lost 0.6% year over year, General Motors (NYSE:GM) lost 3.9% and Fiat Chrysler (NYSE:FCAU) 11.2%. Toyota (NYSE:TM) lost over 11%.
When 2016 set records, there sure is a lot of room to fall. What concerns me most with Ford is how, in a record-setting year for auto sales, Ford actually had lower income. What's going to happen if sales fall in 2017?
Ford has spent a lot of time and money on its Aluminum pickups. First the F-150, and now the more recently redesigned Super Duty trucks. I see a big part of 2017 being whether or not that expense pays off. The automaker noted that, while its car sales fell 17.5%, F-150 sales grew by 2,600. The new Super Duty trucks are averaging a cost $10,000 higher per purchase than the former model. They also said that total sales went up 24% (in November) compared to a year prior.
A lot will revolve around the forming debate about how tax reform needs to play out. For those trying to decide where to stand on Ford, the coming weeks will be very important. Trump has said that info on a comprehensive tax plan is coming. The details that ensue will be consequential in Ford's success this year.
Broad-based tax reform (and eased regulations) covering business and individual taxes would certainly create an environment that entices private spending. This would mean people would have more money to spend on a new car, and Ford would have more cash to operate. Proper easing of financial burdens on carmakers is essential if Trump truly wishes to carry through with his "buy American, hire American" theme.
The most controversial, and what would be the most game-changing idea in tax reform, is Trump's idea for a border tax. Obviously, Ford and GM would benefit the most from a tax on imports, versus Toyota or even Fiat Chrysler (they make some jeeps in Italy). Though there should still be some concern as to what pricing issues would ensue from such an act.
There needs to be lower corporate taxes to help entice and lessen the burden on automakers manufacturing in the US. If that happens, I could see Ford's share price doing quite well through the year. If not, I see a lot of havoc coming as the government fights over protectionism vs. free market capitalism.
If Corporate taxes are lowered, Ford looks attractive. I think you'll see a stark shift in net income as well as better sales from customers having more spending power. The automaker's stock price is cheap in terms of valuation and I see a run back to $15-$16 a share if truly significant tax reform occurs.
I would also stress again that Ford has had an expensive year with the costs of its new Super Duty trucks, and investment in driverless cars. Now that their pickups are finished and bringing in cash, we should see a little bit better situation in the earnings department.
I'll be writing sequels to this as the tax debate takes form.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.