Despite Junk Credit, Ford Stock Still Hasn’t Been Downgraded by the Markets
Ford’s (NYSE:F) senior unsecured rating might have been downgraded to junk status by Moody’s, but Ford stock has still not been downgraded. The impact of the junk status rating on F stock was limited and indicates that investors are not worried about any credit stress.
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It is worth noting that F stock price is exactly at the same level as it was a year before. Clearly, the markets are waiting for the next trigger, but market participants have not given up on Ford.
I am in agreement with the markets and I believe that Ford can still survive and grow. This coverage will discuss the factors that can be potential positive catalysts.
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Ford is Battling To Survive
Weak sales in the traditional car segment have already been discounted in F stock price. The markets are now focused on how the company’s electric vehicle plans shape-up.
Ford is betting big on the EV segment, which can potentially transform the organization and the growth outlook. To put things into perspective, Ford plans to launch a series of electric vehicles in the next 2-3 years. By 2022, the company expects 50% of sales to come from electric vehicles.
It is true that the EV segment already has significant competition. However, Allied Market Research expects the EV market to grow at a CAGR of 22.3% between 2018 and 2025. Therefore, the market has enough potential to absorb new entrants.
It is also worth noting that China has a market share of 57% in the EV segment. Ford has big plans for China with 10 new EVs to be launched within the next three years. This can help Ford accelerate revenue growth.
While Ford will launch several models, I believe that consumers will be looking forward to the Mustang Electric Performance SUV that will arrive in 2020. Further, with the crossover segment gaining popularity, the Puma EcoBoost Hybrid will also be eagerly awaited.
The bottom line is that Ford is changing in sync with industry trends and will keep the markets excited with several new launches.
It remains to be seen if this translates into top-line growth. However, the EV segment is growing fast and it is very likely that the de-growth trend will reverse.
Ford has Ample Liquidity Headroom
I am also of the opinion that Ford has ample liquidity for restructuring and growth investments. In June 2019, the company reported $22 billion in cash and $16 billion in marketable securities, bringing the total liquidity buffer to $38 billion.
While Ford stock does have automotive segment debt of $13.9 billion, I don’t see servicing as a concern. The annualized interest expense on automotive debt is likely to be in the range of $900 million to $1 billion.
With adjusted EBIT of $1.7 billion for the second quarter of 2019, the annualized adjusted EBIT is likely to be $6.8 billion. Therefore, the EBIT interest coverage is likely to be in the range of 6.0 to 7.0. Clearly, there is no debt servicing concern.
In addition, the company’s adjusted free cash flow for the last 12 months was $3.7 billion. This provides additional liquidity cushion. However, I believe that Ford needs to reduce dividends. This will allow the company to save cash for growth initiatives planned for the next few years.
Final Words on Ford Stock
Ford does have concerns as evidence in its sales decline. In addition, weak global macro-economic conditions add to the challenge. However, it is too early to write-off Ford stock.
Be it the electric vehicle segment or advances in development of autonomous vehicles, Ford has been changing to cater to the current demand.
F stock has also been sideways for a year and indicates that the markets are waiting for the next trigger. I do believe that it’s likely to be positive with a series of new model launches in 2020 and beyond. This can possibly take F stock price higher after the current consolidation.
Even from a credit perspective, Ford is not on the brink of a major balance sheet stress. However, I do believe that reducing dividends and conserving cash would be a good strategy.
Overall, Ford stock is worth accumulating at current levels with a two-to-three year investment horizon. Of course, a quarterly review of the investment decision is necessary after analysis on revenue impact of new model launches.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
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