Ford Motor (NYSE:F) has been preparing for a downturn for years. But not too many auto executives -- or auto investors -- ever expected to see what we've seen in the last few weeks: Factories shut down and employees sent home to wait out a virus pandemic.
Through it all, Ford's stock has had a topsy-turvy ride, losing 20% of its value just in the past two weeks.
A whole lot of things have changed -- for Ford, for the auto business, for everybody -- since the beginning of March. It's a whole new world in some ways.
So here's today's question: With prices way down, and the coronavirus upon us, is it time to buy Ford stock?
Let's start by taking a look at where Ford was before the COVID-19 virus broke out -- and where it might still be once the virus passes, if the economy recovers quickly.
The case for Ford before the coronavirus
Ford has struggled in the past few years. Some mistakes in China and a U.S. product line that was getting long in the tooth were putting pressure on Ford's profit margins long before most of us had heard the word "coronavirus."
But by the end of 2019, there were some reasons to think Ford was turning the corner -- reasons that might still be valid once the pandemic fades:
- A rock-solid balance sheet. Before the current crisis, Ford's debt load was modest and well-structured. Ford also had plenty of cash ($22.3 billion as of the end of 2019) and ample credit lines, all set aside to ensure that it could continue to fund its future-product programs through a recession.
- China was looking up. Ford China got a new management and a new strategy. The moves it made in 2019 -- cost cuts, fresh products, inventory reductions, and much-improved relationships with dealers -- were setting the stage for a rebound before the coronavirus broke out. (With China now working on getting back to normal, the country could be a relative bright spot for Ford as the year goes on.)
- New products are coming. Ford launched all-new versions of the Explorer and Escape last year. (The Explorer launch was kind of a mess at first, but Ford had it back on track at year-end. The Escape's launch went well.) This year, Ford has the long-awaited all-new Bronco off-road SUV on the way, along with a smaller Escape-based Bronco Sport and an all-new iteration of the huge-selling F-150 pickup. Much more, including a new Mustang and products in new-for-Ford categories, will follow in 2021 and 2022.
- Technology investments will soon pay off. Electric vehicles? Ford has a nice one -- the Mustang Mach-E sports SUV -- on the way soon, with electric versions of the F-150 and Transit commercial van set to follow. Ford has promised that all will profitable in the near term, helping to pay back the investments that Ford has made in electric-vehicle tech over the past few years.
All of that, plus Ford's tantalizing dividend, was the bullish case for the stock as of the beginning of 2020. At that time, there was one big concern about Ford's stock: A recession was starting to look like a possibility, and auto companies' profits (and stock prices) have historically tended to fall during recessions.
A lot has changed at Ford in the last two weeks
As we've observed, the world -- and Ford's situation -- have changed a lot in the last two weeks.
- Under pressure from the United Auto Workers and lots of worried employees, Ford shut down all factories in North America and Europe, as well as several other factories in South Africa and Asia.
- Ford then suspended its dividend and drew down $15.4 billion -- every penny available -- from its existing lines of credit.
- CEO Jim Hackett told employees that cost cuts are coming, probably this week, but there will be no job cuts, at least for the time being.
- In a move that recalled Ford's quick shift to building B-24 Liberator bombers after the U.S. entered World War II, the company said it is working with 3M (NYSE:MMM) and the healthcare division of General Electric (NYSE:GE) to begin mass-producing masks, respirators, and hospital ventilators, all urgently needed by healthcare workers and first responders battling the pandemic.
- Last but not least, Ford lost its hard-won investment-grade credit rating, on concerns that the pandemic might leave the U.S. in a deep, prolonged recession.
The news of the dividend suspension was a tough development for longtime Ford investors. (Full disclosure: I'm one.) That said, it's no surprise that Ford suspended its dividend under the circumstances, given its urgent need to conserve cash. Ford paid out $2.4 billion in dividends last year; it was the right thing to do.
Ford's road ahead is hard to see right now
Here's where things stand: With most of its factories shut down for now, Ford isn't generating much revenue, but it still has bills to pay. (Ford, like most automakers, records revenue when its vehicles are shipped to dealers.)
For Hackett and Ford's senior leadership team, the big questions right now include:
- How long will our plants be shut down?
- What will the economy -- and the market for new vehicles -- look like once the pandemic fades?
- What can we cut, suspend, or renegotiate right now to try to make our cash hoard last as long as possible?
I expect we'll hear some of Ford's answers to that last question soon, possibly this week.
Ford said last week that it hopes to reopen a few of its factories in the U.S. and Mexico in April. (The factories in question make pickups, commercial vans, and the Fusion and Lincoln MKZ sedans.) If it can do that safely, and if its dealers are placing orders -- two big "ifs" -- then it will have at least some revenue coming in to help keep the lights on for the time being.
But make no mistake: Ford is burning through a lot of cash -- possibly a billion dollars a week or more -- while its factories are idled. And whether the pandemic passes quickly or not, the recession we were starting to worry about in January is now upon us.
Should you buy Ford now?
The act of buying Ford stock now is a bet that the company will survive this crisis and recover to thrive and profit, without a huge government bailout or a trip through bankruptcy court.
I think that's a good bet. I made a similar bet on Ford in early 2009, and I'm glad I did.
At $5.19, its closing price last Friday, Ford's stock is pretty cheap given the potential for growth and profit that I expect the company to have once the economy is back to normal.
There have been moments in the last few weeks when Ford's stock was even cheaper. There may be moments in the coming weeks or months when it gets cheaper again.
But if you're a long-term investor, and you like where Ford was going before the coronavirus broke out, this is an opportunity.