Can Ford Become A Top Investment Once More?

For many years, Ford was a stalwart of the U.S. car manufacturing sector. These days, investors wonder if the company will ever get back to these heights.

Aug. 4, 2020

The automobile sector has been hit hard by the coronavirus pandemic, and while Ford (NYSE: F) was struggling even before this outbreak, the global health crisis has only deepened the company’s situation. Is there any way back?

Why is Ford performing so poorly in recent years?

Ford reported a second-quarter pre-tax loss of $1.9 billion on July 31, a final figure that was a lot better than the $5bn loss it had previously estimated when the pandemic lockdown was in full swing. There was $1.1 billion net profit for the quarter, which would have been a loss if it was not for the $3.5 billion gain on its investment in the self-driving software Argo AI.

Just look at our returns versus that of the S&P 500! Click here to find out how we continue to beat the market and view the list of stocks we think will turn out to be the next Amazon, Tesla, or Netflix!

The pandemic is not the sole reason why the company is in trouble. While its original rise to the top was fueled by being a pioneer in the likes of mass manufacturing, forward-thinking vision and having contemporary work policies, Ford is no longer a pioneer. 

With consumer tastes shifting, Ford is in the middle of significant restructuring, and sales have been weak. In 2019, vehicle unit sales dropped by 3.2% compared to the previous year.

Large overheads have been a major issue. For example, Ford spent about $7.4 billion on research and development in 2019, with similar levels of R&D spending in the preceding years. The company does not have a whole lot to show for it.

How is it faring versus its rivals?

Ford has been lagging the likes of Tesla (NASDAQ: TSLA) and General Motors (NYSE: GM) in recent years. Ford has struggled to adapt to changing market conditions and innovate like the rest of them, as it struggles to adapt to changing market conditions, unlike the competition.

. Tesla has been the biggest success story as of late in the car manufacturing space. Its share price has exploded from the $240 mark in July 2019 to $1,500 a year later. 

While the current price looks to be significantly inflated, there is no denying that Tesla has been making great strides. The company managed to beat earnings estimates and has become profitable. Tesla is the clear leader in electric car sales in the U.S. holding more than half the market, with everyone else playing catch up. In an overall sense, it is interesting to compare the recent financials of the two companies. Ford had sales of $155.9 billion and a net profit of $47 million in 2019 compared to Tesla’s $24.58 billion revenue and a loss of $862 million.

General Motors has been a long-time rival of Ford and while it has experienced its own issues recently, it is in a much steadier position than its rival. The pandemic did lead to a $806 million loss in Q2 after burning through $7.8 billion worth of cash. However, management expects to generate between $7 billion and $9 billion in free cash flow in H2 and the loss was not as bad as expected by analysts.

The company has also been aggressively cutting costs for some time and getting out of unprofitable markets. While it will be a tough few years for GM, it certainly looks to be more stable than Ford. 

Is there any hope?

If Ford is to emerge from the ashes of what is one of the toughest periods the car manufacturing industry has ever seen, there needs to be immense guidance. This starts with CEO Jim Hackett who needs to put in place a clear plan and vision to emerge from the current mess. With low expectations, any improvements will be a positive for investors. 

The reintroduction of the Ford Bronco to the main product line will also be a major move. Ford relied on its F-Series models for about 38% of the total cars it sold in the U.S. in 2019 with 896,526 units delivered.

Over 150,000 people to date have made a reservation to get the Bronco 2021 model, with the iconic SUV not having been manufactured since 1996. The company is also looking to gain a presence in the electric car market, with its first all-electric vehicle (Mustang Mach-E) launching in 2021.

While investing in Ford is still a risky move, there will likely be momentum for its stock price if Hackett can steady the ship and give confidence to investors that there is some light at the end of the tunnel. However, it is a long way off becoming an A-lister stock once more.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above Read our full disclosure policy here.