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Ford: The Bottom Is In, But Don't Buy

Jul. 17, 2017 11:33 AM ETFord Motor Company (F)110 Comments
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General Expert


  • I remain confident that Ford has little downside from here.
  • Investors should stay on the sidelines because fundamentals are still deteriorating.
  • The market is pricing in bad news, but we need good news.
  • The new CEO and the potential steel tariff create uncertainties that could pressure the stock.
  • More clarity is needed regarding the timing of a cyclical upswing before Ford can become a solid buy.

In my previous article I talked about why you should not buy Ford (NYSE:F) at 52-week lows, but now I am saying that the bottom is in, am I contradicting myself? The answer is no. While I believe that Ford doesn’t have much downside at these levels, I still don’t think now is the time to buy.

Bottom Is In, But Hold Your Horses

I say this with confidence because the stock actually popped on what looked like terrible June U.S. sales figures (-5% year over year). It hasn’t done much since then, but the fact that the market is rewarding the stock despite what is a clearly a persistent trend of sales deterioration tells me that negative news have been priced in already.

While long-term holders can take a breather, I would still caution against excessive optimism. The problem is that even though investors seem to be stomaching bad news well, the idea is that the bad news will eventually stop coming. No one is investing in Ford believing that sales will fall 5% annually over the long-term. Given this, I believe it is improbable that investors will continue to reward poor sales with persistently higher stock prices as we go forward. We must see fundamental improvements, not just “better than expected.”

There is also uncertainty regarding how the reduction in sales will flow to the bottom line. We know that the management is actively monitoring the cost structure and making cuts as necessary, but I’m sure that there will still be a significant amount of operating leverage involved. Even if we assume 90% Non-GAAP pre-tax profit sensitivity due to the company’s efficient restructuring (which is a very aggressive assumption), every 1% decline in sales would still lead to a 2.4% drop in pre-tax profit based on 2016’s financials.

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Analyst’s 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.

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