Ford's Stock Declines Are Likely Far From Over

Summary

• Ford stock has responded negatively following quarterly results.
• The company reported a big drop in sales for the month of July.
• Some in the option market are positioned for the stock to fall further.
• Looking for a helping hand in the market? Members of Reading The Markets get exclusive ideas and guidance to navigate any climate. Learn More »

gopixa/iStock Editorial via Getty Images

Ford (NYSE:F) reported better than expected quarterly results recently, which easily beat estimates. This has prompt sell-side analysts to raise their consensus earnings and revenue forecast for the company for the rest of 2021 and 2022. However, the company noted on August 4 that its US retails sales dropped 37.7% in July, with cars falling 78.7% and SUVs dropping 30.5%.

Despite the strong results and positive upward revisions, the stock has struggled to advance, giving back all of its post-earnings gains. Now the options market is betting the stock continues to struggle and falls further, as it was betting would happen before the company reported results at the end of July.

Estimates Are On The Rise

The stock has responded negatively to the last round of disappointing quarterly results. Still, following those results, analysts have increased their revenue estimates for 2021 and now see Ford's sales climbing to $130 billion from $128.5 billion. The big jump in sales growth is expected to occur next year, with revenue now forecast to rise to $158.7 billion versus prior estimates of $156.5 billion back at the end of July. Growth is expected to slow dramatically though heading into 2023, with sales estimates rising to $160.9 billion.

Earnings estimates for 2021 have risen the most to around $1.61 per share from $1.20 at the end of July. With earnings growth slowing and rising to $1.90 and $2.11 in 2022 and 2023.

Good News Is Already Priced In

The big problem for the stock is that it already reflects much of this future growth. The equity currently trades for 6.7 times its 2-year forward earnings estimates, which is exactly in line with its historical average of the past 5 years. The stock may see multiple expansion over time, but with the earnings growth rate likely to decelerate in coming years, it is doubtful that the stocks multiple would expand much from its current level.

Additionally, the equity is not cheap from a price-to-sales standpoint, trading for 0.34 times its 2023 sales estimates. That is well above its historical average of 0.27 over the past 5-years. It is also in line with where the stock was in 2016 and 2017. It too would suggest that much of the good news for the stock going forward has already been priced in.

Bearish Options Position

This is likely why the options market continues to show some very bearish positioning for Ford. On July 30, the open interest for the Ford October 15 $14 puts saw a large increase in their open interest level, around 38,100 contracts. The data shows that these puts were bought on the ASK for roughly $0.84 per contract. This would imply that the stock is trading at $13.15 or lower by the expiration date in October. It is a fairly sizeable bearish bet that the stock will fall too, with almost $3.2 million premium paid.

Weak Technical Trends

The technical chart for Ford remains very bearish and suggests that the stock's decline is far from over. The stock did move higher following results; however, the shares quickly reversed those losses in the following days. On August 4, the equity finds itself sitting on support around $13.50, but a break of that level of support likely sends Ford even lower, possibly to $12.75. Momentum indicators remain very bearish using the relative strength index and the MACD, indicating that stock declines have not been completed.

Ford's stock had a huge run, but that all seems to be unwinding now, as it appears a lot of good news has already been priced into the shares. It means the onus will be on the company to get investors to become even more optimistic. However, some options traders do not see that happening anytime soon, and the weak July sales data isn't likely to help, even strengthening the bear's case.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.

Comments

[idaustin]

And F continues to outperform since this article was written. Thanks for writing

[idaustin]

Aug 4, F was $13.75ish, and up to $14.40 today on an otherwise down day for the overall market, outperforming SPY by almost 400 bps since beginning of August. Guess the MACD meant nothing (once again)

[Bold Investments]

How to find a better investment than Ford? Blindly type 4 letters- that ticker is a better investment

[Actionable Conclusion]

If one is going to invest in the auto sector in the 2020s... they need to ask the right questions.

1) Who has the superior science?
2) Who has the brilliant innovations?
3) Who innovates faster than the rest?
4) Who has the best designs and engineering?
5) Who has superior software?
6) Who has growing revenue?
7) Who has growing gross margins?

We need to ask the right questions, and we need to know where to find the right answers.

Most are not asking the right questions, and not interested in finding the trusted sources for the honest and insightful answers.

Its never easy... at least not for me

[Risk Advisor]

@Actionable Conclusion

Who executes better than all the competition after all the future plans are announced?

[Actionable Conclusion]

@Risk Advisor

Plans? Announcements?

[Stewart Foreman]

@Actionable Conclusion

Assume for the moment I agree that Tesla is the answer to all those questions. (I don't agree, but assume I do).

What if I told you that Tesla should therefore be valued at about 4x Ford which would put Tesla at a $200 billion valuation trading at around $300/share? Because after all, it is a car company.

[wazoomann]

We can look at charts or we can think about the products. Car companies are first and always about their products. If you can read a market, you will have better insight into who will go up/down in profits. I was fortunate enough to read the market over a year ago. It wasn't terribly hard. I wish I'd also bought dealer group stocks as they went up even more, but I didn't think of it at the time. I just knew that GM and Ford were vastly under valued.

Going forward, once the chip issue is resolved, Ford will do very well in trucks w the Lightning. Why? Not because the Lightning will be a great product. But because every truck buyer will go to the dealership to check it out, and probably buy a Ford (ICE or EV...doesn't matter).

Will the stock go up from $14-16 range? If they reinstate the dividend, yes. Then, I'm out unless I see something good from the EV/Hybrid market.

I think EV adoption will take longer than the "pundits" claim btw. We have a major infrastructure problem in the US (reliable power for fast charging) in major cities. Especially CA, NY, MA where EV regulatory adoption is strongest.

[Risk Advisor]

@wazoomann

It is always about their products, but note the cyclicality of being in the business. If you are carefully following Ford, you will notice that Mr. Farley is hell bent on growing Ford's service revenue, such as Ford Pro.

He recently lamented the fact that the history of Ford has been introducing new products to the market and over time gradually providing such high incentives while trying to keep the products fresh, that over the long term, the profit margins are seriously eroded. And the cycle is repeated.

Service revenue however hopefully in his words creates a steady stream of revenue without all the incentives. EV provide an excellent opportunity to grow service revenue, as does AVs.

[arnold.bird]

@wazoomann “think EV adoption will take longer”.
It’s more a matter of availability than adoption. When good EVs are available, people buy them.

“major infrastructure problem in the US (reliable power for fast charging)”
Gas pumps don’t work during a power outage. So a power outage affects both ICE and EVs. It’s possible to generate your own electricity at home (solar) for charging, but not possible to install a gas pump at home.

[wazoomann]

@arnold.bird Good points. I’m not talking about power outages. I’m talking about actual grid draw from fast charge stations.

Agreed on home battery storage, that’s the ideal but will take decades.

[Legacy Legends, LLC]

"Ford stock has responded negatively following quarterly results."

Fake American Biden is working on it! Tesla Cybertruck steel 100% made in America!

Screw GM and Ford! Get rich buy TSLA!

[Little Black Sheep]

@Legacy Legends, LLC

🤪🤪🤪🤪
Whatchamabob

[idaustin]

If the options muppets, I mean market, makes a bearish bet, then surely it must be so. How dare Ford trade at .34 p/s when historical p/s is .27 x, and oh my, the “macd” supports a continued decline. What a bunch of absolute hogwash

[RickJensen]

@idaustin
I was going to leave this alone, but now you got me started.

Here's the problem with charts. They show you 2 things, where you have been and where you have been. They DON'T show you where you are going, unless ATBE and there are no changes.

Like Mach-E:
"Ford Electric Vehicle Mustang Mach-E Sees 15.8% Rise In July Deliveries: 'They Are Gone As Soon As They Hit The Dealers'"
Now a chart doesn't know this CAUSE IT'S A CHART!

So charts are ok for somethings, but unless EVERYTHING stays the same (and you don't compensate for new events with offsets), then you don't know what you are doing, with a chart.

[rjkok]

@RickJensen charts are the perfect rearview mirror.

[rjkok]

@RickJensen I look at charts occasionally for history, and use a 5 - 10 MA for buys and sells. The one thing that bothers me a bit in Fords near past, is a little pesky gap around 12.25 on May 19-20. I hate gaps. care to opine?? curious as to your thoughts.

[VoiceofSanitySometimes]

The problem with F, GM, etc is that cash flow is going to suck for the next 10+ years. They've committed to be 50% EV sales by 2030 or so, which means massive capex into that product category. But they also need to keep pouring large capex into their ICE product lines because they'll still be the other half of their sales, and probably the more profitable half.

They are going to have to open new factories for their EVs, while maintaining the factories for their ICE vehicles while they run at lower volumes.

They are likely going to have to strike new arrangements with their dealers, and you can be sure that the UAW will use their urgency to get to EVs as a weapon in negotiations.

And don't forget the mgmt turmoil in the companies as the ICE "old guard" and the EV "new guard" fight for control.

Always money to be made trading short-term technicals / sentiment if you can figure out the patterns, but I prefer to trade in stocks with medium term upside that gives me wiggle room to make mistakes.

[RickJensen]

@VoiceofSanitySometimes
Oh yea of little knowledge but lots of opinion.

F has designed a plan that will cost 25B to execute. As part of the entirety of the plan, comes approx that much in savings. Now the savings comes later. So at then end of 5 years, is all goes well, F will be saving 25B.
And those savings combined with much better ATPs and much better margins, (lowered expense and CAPEX) will open the cash flow tap.

Then there's MaaS (Oh god, here comes vooch)

[gametv]

@VoiceofSanitySometimes What is really happening in the transition to EVs is that there is more competition coming. And once true autonomy catches on, private ownership of cars will plummet.

I can easily see owning just one car for our family and using an autonomous ride share for everything else. And if our Model 3 goes for 200K miles, then we might not buy another car for a decade.

The auto company profits are riding high as their finance divisions can sell used cars for a bundle and they are maximizing sales of higher margin cars in the shortage. That only lasts a little while longer.

End of stimulus money, plus end of chip shortage, plus end of transition away from public transport will happen soon. The current stock price is built on a very rosy scenario.

All the wasted money that was pumped into consumption by governments will be a weight on the economy going forward, like trying to swim with a 30 pound weight. You can do it for a little while, but it is going to end pretty soon.

[RickJensen]

@gametv
" And once true autonomy catches on, private ownership of cars will plummet."
--Try again, do you think anyone who can afford not to, will put there butts where a pile of vomit was 24 hours ago.
Ever heard of COVID?

[Van_basten09]

All stock will drop significantly according to your articles....

[RickJensen]

@Van_basten09
Isn't it great when you can be so general, that it's almost impossible to be wrong.

[Henry_22]

@RickJensen It's like being a weatherman on the TV and saying, "tomorrow the temperature is going to be between 32 degrees F and 85 degrees F. I've never been wrong."

[RickJensen]

@Henry_22
Tomorrow:
Begins with light, followed by darkness.

[Stonks Go Up]

My favorite author on SeekingAlpha is back!

Mott Capital Management is the best contrarian indicator in the market. By far.

I bought MU when this guy advocated that the gates of hell will open up in two separate article when it was in the 70s and made bank.

I have no doubt that F will rocket from here.

Thanks again Mott for helping me find things to go long on...

F in the chat boys!

[AQL1010]

@Stonks Go Up In his defense he never specified how “likely” and how “far” 🤔

[michaeldamian]

This is probably one of those articles that I see a year later and the stock is up 25% or so. SA ratings are very strong so who's right? We'll see next summer!

[pann2310]

Have you ever considered writing a positive article. Mix things up a bit.

[flong]

@pann2310 Contrary to disclosure, I guarantee this Company is probably overloaded in GM or Tesla or both!

[cmps30a]

If I were to buy an electric vehicle I would buy Ford only. Because Ford has been punished enough by Japanese car makers to learn to keep quality issues in check. Not sure I would even how Tesla paint job.

[~BigZ~]

Biden EV targets to be supported by companies such as General Motors, Ford Motor and Stellantis www.cnbc.com/...

... looks like more good news that hasn’t been “built-in” $F +2.55%

[Risk Advisor]

@~BigZ~

Exec order signed today.

[RickJensen]

@Risk Advisor
Ah, jeez, what a mistake. My kids are going to own about $1B each to pay off the national debt. Where the hell is all this money coming from?

[Gregary]

@RickJensen have your kids take out some student loans and have a party! Oh wait, that just adds the burden, when Sleepy Joe forgives those loans

[cmps30a]

That is a pretty good PE ratio. Now if Ford with electric vehicle sales should be better. If I was Ford I would still produce gasoline trucks and high selling vehicles like Bronco. I think Ford will capture the Electric vehicle market from Tesla and GM.

[Mintinvester]

Cheap stock, revolutionary products on market selling like hot cakes, and more exiting products in the pipeline. Low risk and high reward in my opinion. Long Ford and adding on dips

[Xandi]

I pretty much figured the stock hit peak when it reached 15. I was so right. It did the same thing many years ago when everyone was predicting the stock will keep going higher and higher. Very sad indeed. With no dividend, why would anyone invest in this stock when there are so many alternatives.

[Ronaldo123]

I already own ford shares and added GM for the first time after it dropped 9% today. The chip shortages are a short term issue and will be resolved in couple months. After that I can see Ford and GM ramping up production and new car sales will soar higher. I don't really agree with the author and will add Ford if it dips lower. Btw, I am going to get the F-150 Lightning Electric. Cheers.

[Skezo]

Holding my 1800 shares. If it drops below 12 will add a few hundred more.

[PEAK AUTOS]

I agree that Ford and GM can fall some more in the short term and I hope they do so that I can buy more shares. Bought more of both today.

I disagree that they are expensive stocks and I am very confident that both stocks will be higher by year end and hopefully by the time they report 3rd quarter earnings. Chips are the key and of course avoiding expensive recalls.
GM took an 800 million hit or around $ 13,000 each for the Bolt recall. Companies have to get EVs correct or recalls will kill them especially the start-up EV companies.

The market can not price start-up EV car manufacturers at such high multiples and traditional car companies that are becoming EV companies plus autonomous driving companies at going out of business pricing so I am betting / investing that start-ups and Tesla's multiples will eventually come down and GM, F, and other traditional car companies multiples will rise and come close to meeting somewhere in the middle which will allow us F and GM longs to make some very nice money.