The Blue Oval's shares have taken a beating. Is it time to buy?
Ford Motor's (NYSE:F) shares have had a rough 2020. Thanks to some out-of-character missteps, and a whole lot of concern about the outbreak of novel coronavirus, the Blue Oval's once-high-flying shares have fallen 38% since the beginning of the year.
Whenever a good company's shares hit hard times, we have to ask: Is this a buying opportunity? Let's take a look at whether it's time to buy Ford stock now.
The case for buying Ford stock
Ford has struggled in the past couple of years, as missteps in China and an aging U.S. product line have put pressure on its margins. But looking ahead, there are good reasons to be bullish about Ford and its business:
- Strong balance sheet. Ford's debt load is modest and well-structured, and it has plenty of cash ($22.3 billion as of the end of 2019) to weather a recession without big cuts to future-product programs.
- New products on the way. That aging product line is getting a jolt of youth that should help Ford's pricing and margins quite a bit over the next couple of years. Ford just launched all-new versions of its big-selling Explorer and Escape SUVs in 2019. An all-new Bronco (and a smaller version, called Bronco Sport) will be unveiled soon, along with a revamped Ranger pickup. Later this year, we'll see an all-new version of the F-150, Ford's biggest money-maker. More, including products in new categories, will follow over the next year or two.
- China is turning around. A new management team -- and a new strategy -- are moving things in the right direction after several quarters of losses. It'll take some time, but Ford appears to have a solid plan to make its China operation sustainably profitable.
- Future-tech investments will start paying off. Ford has several electric vehicles coming, including the Mustang Mach-E sports SUV and electric versions of two of its fleet stalwarts, the F-150 pickup and the Transit van. All are designed to be profitable in the near term, which will help pay back the hefty investments that Ford has made in the technology.
But what's the the case for the stock right now?
The case for buying Ford stock right now
There are two things that make Ford's stock especially interesting right now:
- It's cheap. Ford is trading at just 6.5 times its anticipated 2020 earnings. That's low: we'd normally expect a healthy automaker to be trading around 10 times earnings.
- It pays a great dividend. As I write this on Friday morning, Ford's dividend yield is a whopping 10.2%, thanks to the fact that its stock price has been clobbered recently. Often, a big dividend yield is a caution sign for investors, because it could be cut. But Ford has long promised that it will try to maintain its dividend through a recession, as long as its cash reserve holds out.
Of course, there are also some reasons not to buy Ford stock right now, or at least to think carefully before doing so.
It seems very likely that the U.S. economy is now (or shortly will be) in a recession, as Americans hunker down at home to wait out the COVID-19 pandemic. Auto sales are likely to fall dramatically for at least a few months: We already know that new-car sales in China fell about 80% in February, when the Chinese government instituted strict quarantine measures.
If there's a recession, even a short one, Ford's sales and profits will fall, and its stock price will probably fall further as well. The risk here isn't that Ford will perish -- it'll be fine in the long run -- but that you might get the stock cheaper by waiting.
Ford's current CEO, Jim Hackett, has received mixed reviews. On the one hand, he's a visionary, with a strong sense of how Ford should best position itself as new technologies transform the industry. On the other hand, he has been criticized for not communicating his vision well to employees, stakeholders, and investors.
The good news is that Hackett appears to have delegated day-to-day management to Ford's new chief operating officer, veteran Jim Farley. Farley probably has what it takes to get Ford where it needs to go -- but he still has to prove it to investors.
Should you buy Ford stock now?
I think you could certainly do worse than to buy Ford stock right now, but I also think that you might do better if you wait. If the coronavirus outbreak pushes the U.S. economy into recession, as seems likely, you will almost certainly have the opportunity to buy it at a better price in a month or two.
That said, I own Ford stock and have no plans to sell. If you already own Ford stock, I suggest hanging on to it. If you sit tight and reinvest that fat dividend through whatever economic storms lie ahead, you'll probably be pretty happy with the results when auto sales (and auto stocks) start to recover.
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