On April 13, Ford Motor (F 6.32%) released a preliminary look at its first quarter results. As expected under a global pandemic that has billions of people around the world under stay-at-home orders and global transportation at a standstill, it wasn't very good. Ford said sales were down 16% on a 21% drop in wholesales vehicle shipments, resulting in a $600 million pre-tax adjusted loss.
It's likely that the first quarter offers just a small glimpse into how bad the second quarter -- and possibly longer -- could be for the company. Much of Ford's global manufacturing footprint is still shuttered, and it's not clear when its North America and European plants will reopen. Auto sales in the U.S. are likely to be far, far worse under what could be multiple months of the economy in park, and the company is set to lose many billions of dollars before the economy gets put back in drive.
In about a year, medical experts are optimistic there should be a vaccine for the novel coronavirus that causes COVID-19, and effective treatments are expected to be found before then. If that proves to be the case, the global economy, which has been forced to brake hard to reduce the spread of the deadly virus, should be accelerating once again.
What does that mean for Ford? What should investors expect for the global auto giant over the next year? Let's take a look.
A mountain of cash to bridge the gap
For years, Ford has carried a substantial cash position on its balance sheet, and in large part because the company wanted to be able to maintain its dividend "through the cycle" as former CFO Bob Shanks described it. Shanks is no longer Ford's CFO, and the company pulled the plug on its dividend in March, but it has continued to prioritize a fortress-like balance sheet. In a highly cyclical industry like automaking, that's proving to be the smart move.
When Ford pre-released its first quarter results on the 13th, it gave investors and update on the state of the balance sheet. As of April 9, Ford had $30 billion in cash, while Ford Credit, the company's auto lending subsidiary, carried $28 billion in liquidity at the end of the first quarter.
That massive cash pile was expected to be helpful during a typical downturn in the economic cycle; management figured it would be plenty enough to help it ride out any downturn in sales and cash flows that comes along with a recession. But the coronavirus pandemic has proved anything but typical, and Ford management says that its current cash balance would be sufficient to last through the end of September, if there were no changes in its current operations.
At present, that would mean only the company's joint-venture manufacturing in China is operating.
A more likely scenario
Chances are, Ford's global manufacturing footprint outside of China won't remain completely shuttered for the next six months. The fact that China -- the epicenter of the COVID-19 pandemic -- has started opening up its own economy and Ford has resumed operations there, offers some glimpse of what is more likely to happen. By early summer, more and more of the global economy is likely to be operating, and the demand for automobiles will start to pick up.
As a result Ford should be operating at least a portion of its manufacturing base, likely its most-popular and in-demand vehicles including its F-Series pickups and other vehicles popular with both consumers and commercial operators. These are also some of Ford's most profitable vehicles, and that should help staunch the bleeding of cash the company will go through over the next couple of months. Even some limited recovery of the global economy will help Ford substantially, and that's the most-likely outcome in 2020.
It's going to be at least another month or more before much of the world starts opening up for business, but when that happens Ford should be quick to get its plants back in production on a limited basis. In the interim, its plans to make respirators and ventilators will help with the fight against COVID-19 and provide some cash flow, but not nearly enough to offset the massive losses from the idling of essentially all of its business.
Back in business, but not back to full speed
The auto industry won't recover more quickly than the global economy, and will probably take longer. The follow-on impact of so many companies and people figuring out how to work remotely could result in some permanent -- if limited -- changes in how we work and do business, affecting demand for automobiles. Even the temporary impact of these changes -- and the financial repercussions for so many companies that are idled -- will result in delayed investments to expand or upgrade commercial vehicle fleets. And that's before even considering the millions of people around the world who will still be trying to recover financially, many of whom will delay vehicle purchases they otherwise might have made.
I expect a year from now Ford's dividend will still be in the parking lot, but all of Ford's factories will be operating and global auto sales will be growing if still down from the peak. In that environment, and after months of burning through a substantial portion of its cash, the company will be focused on rebuilding the balance sheet and being competitive in every market it operates in. The dividend will eventually get reinstated, but until management knows the company is safe from the next economic shock, even the payout will be of secondary importance.