Ford (F)

Not many industries have suffered the detrimental impact of Covid19 like the Auto industry has. Chinese factories responsible for manufacturing car parts closed down for much of February and March, while similar factories in Europe closed down on March 19. This left the US assembly plants with little product to work with, and then they themselves were closed down by late March under strict government restrictions.

Almost immediately, and from out of nowhere, there was no product being made. Which wasn’t a big problem for the consumer because no one was driving anywhere anyway. With the world in lockdown citizens were confined to their homes and domestic car travel was limited to a quick trip down to the local shops and in a lot of cases not even that. The entire industry was brought to a screaming halt within a matter of weeks.

It’s why the focus of our stock report today, Ford (I guess you could call it a Ford focus – sorry), has halved in price since the start of the year. With global car sales expected to fall by 22% in 2020 according to IHS Markit, and US sales to drop by 26.6%, it’s no surprise that the car companies are doing it tough.

Back in January Ford was heading for a bumper 2020. After a tough couple of years selling dated models, they had just recently released brand new versions of their popular Explorer and Escape models, while a new model of the flagship F150 truck (those big beasts that Americans love to drive) was expected to hit showroom floors later in the year. It was a perfect recipe, all set up to finally lift that share price out of the doldrums.

Fast forward to May 2020, and they haven’t been able to even manufacture a car let alone sell one to a customer. When earnings came out last week it showed Ford had lost $2 billion in the first quarter, with revenue dropping by 14.9% to $34.3 billion. Second-quarter earnings were expected to be even worse, estimating losses of more than $5 billion. But all is not lost, and I suspect that at these bargain-basement prices Ford will be a great buy and hold stock for the next couple of years.

The US Federal and State governments seem overly gung ho in reopening their economies at the moment, and car manufacturing plants are at the forefront. Recently, company management has indicated they plan to execute a “phased reopening” of domestic plants as early as this month. And with factories coming back online in China in March there is product available to get things moving again.

To protect employees from being exposed to COVID19 health and safety protocols are already being used overseas and will be implemented in all Ford domestic plants as well. A company spokesman stated this week “The standards and precautions introduced this week expand on those used in Ford facilities in China, where work has already resumed, and in the U.S., where Ford has been manufacturing medical equipment for weeks”.

Once there is product available you then need a buyer. When restrictions are finally lifted in the near future, changed habits may just be an advantage for the carmakers. It’s already a given that international travel will either be outlawed or at least heavily restricted initially. And much like Australia, US citizens will be taking their holidays domestically. Cue a population of 328 million desperate to get out of their houses and go on a road trip.

Air travel will likely be less popular with people trying to avoid heavily populated modes of transport. As will many modes of public transport, forcing people back into their private cars. And with higher car usage comes the need for an increase in new car purchases.

The car industry has always been cyclical, with the success of a car makers share price closely related to the economy as a whole. As the economy takes off so will the car makers, with an extra boost thanks to the way consumers will prefer to travel.

Ford’s financial situation was strong coming into the pandemic drama. Management had been careful to set themselves up for a rainy day such as this. The company burned through $2 billion in cash during the first quarter but advised in their earnings call they still have $35 billion in cash to spare. They’ve also accessed $15.4 billion from their line of credit, as well as saving $2.4 billion in cancelling their dividend. They’ve got plenty of support to ride out the current downturn, and I would imagine the dividend will come straight back into play as things turn around again.

With the share price at a 50% discount, a strong financial footing, and the potential for a big lift in pent up demand I think Ford will be a great buy and hold for the next few years. Even if we see the market take another dip I think there is a whole lot more upside potential than down. Ford will be a great stock to “drive” your portfolio forward in the coming years.