Please ensure Javascript is enabled for purposes of website accessibility

Why Shares of Ford Motor Company Are Down Sharply Today

By John Rosevear - Mar 9, 2020 at 10:24AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

An oil crash and virus fears have traders worried about the economy.

What's happening

Shares of Ford Motor Company (F -1.06%) were down sharply on Monday, as a collapse in oil prices and growing concerns about the novel coronavirus, COVID-19, sparked a broad-based market sell-off.

As of 10 a.m. EDT, Ford's shares were down about 7% from Friday's closing price.

So what

At first glance, a big drop in oil prices might seem bullish for Ford, given that it generates the majority of its profits from the sale of trucks, SUVs, and commercial vehicles. But there's a larger concern at play here: The coronavirus epidemic and the drop in oil prices have many traders worried about a recession, and recessions are bad news for automakers. 

A blue 2020 Ford F-150, a full-size pickup truck, is shown pulling a trailer.

Falling oil prices won't hurt Ford's truck sales, but a recession would. Image source: Ford Motor Company

Automakers like Ford are cyclical businesses, meaning their sales and profits rise and fall with consumer confidence. Because automakers have such huge fixed costs (plants, equipment, labor contracts), they need a high level of sales just to break even -- but sales tend to fall sharply during recessions, and automakers' profits tend to fall even more.

Put another way, a 20% decline in sales would cost Ford (and its rivals) much more than 20% of its operating profits.

Now what

In China, where government authorities have mounted an aggressive response to the epidemic, auto sales fell 80% in February. A similar situation in the United States would hit Ford very hard. 

It's still too early to tell how the coronavirus will play out in the United States and much of Europe. But given China's example, it's reasonable for Ford investors to worry about what might lie ahead, even if gas prices are headed downward.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Ford Motor Company Stock Quote
Ford Motor Company
F
$11.20 (-1.06%) $0.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.