Ford Stock: Risk Factors To Consider
- Our positive outlook on Ford Motor Company's stock remains intact. However, given recent concerns regarding a contagious banking crisis, we felt the need to highlight a few of the company's primary risks.
- In our view, worries about Ford's fiscal loss are overcooked. Most of the firm's misfortunes were due to non-core events such as impairments, marketable security losses, and abnormal inflation.
- Nonetheless, the company's financial statements reveal a few critical concerns relating to a receivables build-up, increasing credit allowances, and high short-term borrowing.
- Macroeconomic features such as inverted yield curves and rising credit spreads remain of great concern.
- We think Ford Motor Company stock remains in good shape. However, we recognize that the stock's general risk framework is intensifying.
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The economy is on a knife's edge, and cyclical stocks such as Ford Motor Company (NYSE:F) look like 50:50 bets. However, unlike our previous discussions about Ford stock, today's analysis assumes an inward look at the company, with its financial statements being front and center. The rationale behind this analysis is not price discovery; instead, we wanted to reveal a few critical risk factors relating to Ford that we believe many investors should know about.
As shown in the diagram below, our past ratings of Ford stock have been somewhat successful. As mentioned before, this article serves as a risk analysis; we remain bullish on the stock but also recognize that Ford hosts a few significant risks.
Looking At The Books
An observation of Ford's salient features shows that the company experienced impressive year-over-year revenue growth, with broad-based revenue surging by 15.93% in 2022, primarily stemming from the company's automotive segment, which climbed by approximately 18.09%. However, a look down the ladder shows that Ford suffered a net loss worth roughly $2 billion, deriving from higher input costs and a $7.4 billion loss on its Rivian Automotive, Inc. (RIVN) investment, along with an impairment of $2.4 on its Argo investment.
In our opinion, both the impairment loss and loss on Rivian are non-core. Moreover, we believe 2022's inflationary pressure was temporary; however, as explained later in the article. Thus, we argue that both factors should be phased out of the equation for long-term investors. Nevertheless, as explained later in the article, demand factors could soon be a concern.
Let us delve into Ford's books to gain a better understanding of what lies ahead.
According to its financial statement footnotes, Ford's automotive revenue is recognized when goods are shipped. This holds true for vehicles, parts, and ancillary goods. In general, we have not spotted any concerns about Ford's revenue as its collectibles have decreased year-over-year while inventory has increased by 16.7% year-over-year. Although much of Ford's increase in inventory value is due to increasing inflation (Ford recognizes inventory under the First In, First Out method), an increase in revenue usually suggests that a company expects robust demand for its products.
However, despite Ford's positive revenue outlook, the company's delayed income is becoming an issue. Ford's trade receivables are usually recorded on a 30-day net basis, which is not substantial for a manufacturer. However, we would like to stress two risk factors: 1) Ford's recent increase in receivables; and 2) the impact that the deteriorating credit environment might have on Ford's receivables.
Ford's trade receivables post allowances increased by 38% during its latest fiscal year, which was accompanied by an 18.98% increase in net of allowance credit receivables. We deem Ford's post allowance receivables build-up a tremendous risk, given that auto credit delinquency is skyrocketing due to resilient inflation and waning consumer strength.
Another concern with Ford is its 66.8% increase in short-term borrowings. Even though Ford's long-term debt increased proportionately, a build-up of short-term debt usually suggests that a company's credit rating has taken a knock, which is perfectly believable, considering Ford's fiscal loss in 2022.
After scanning Ford's 10-K, we could not discover a uniform reason behind the firm's higher short-term debt, increasing our skepticism.
Macroeconomic Outlook - The Yield Curve And Credit Spreads Remain Of Concern
I am aware that many readers do not support our use of the yield curve as a determinant for demand-side factors; however, the reality is that the yield curve and cyclical stocks such as Ford hold a very strong correlation.
Why is that? Because the yield curve provides a summation of the macroeconomic outlook, concurrently displaying future consumer spending power.
The U.S. and many European yield curves are currently inverted, meaning the economy is likely set for a downturn. Additionally, rising credit spreads confirm the argument. The previously mentioned factors are likely to lead to scarcity of debt, higher savings (instead of spending), and higher equity risk premiums. Thus, we think automotive stocks like Ford are at higher risk than they would usually be with a moderately upward-sloping yield curve.
At the other end of the playing field, Ford has high-quality idiosyncratic features such as a high industry focus, a loyal customer base, product differentiation, and an integrated value chain, allowing for consistent operating performance. Therefore, we consider the yield curve scenario a risk instead of a dominant influencing variable.
Final Word: Don't Trade It, Just Consider It
As stated in the introduction, this article aims to outline critical risk factors related to Ford's stock. All investments (including "risk-free" bonds) have inherent risks, and we felt that recent analyst reports have failed to cover Ford's unique risks.
Based on our analysis, Ford's fiscal loss in 2022 is not a concern as most of its misfortunes were non-core related. However, in our view, Ford Motor Company's financial statements contain worrisome features pertaining to its receivables, short-term debt pile-up, and exacerbated credit allowances. Furthermore, the economy remains a threat to Ford's investors, as rising credit spreads coupled with an inverted yield curve spell higher equity risk premiums for cyclical stocks like Ford.
We remain bullish on Ford Motor Company stock. However, we recognize that key risks persist, which might alter our outlook if not curtailed.
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This article was written by
Quantitative Fund & Research Firm with a Qualitative Overlay.
Coverage: Global Equities, Fixed Income, ETFs, and REITs.
Methods: Factor Analysis, Fundamental, Valuation, Street Gossip, and Common Sense.
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