What happened
Shares in Ford Motor Company (F 0.69%) declined 16.3% in December, according to data from S&P Global Market Intelligence. The move comes as further signs of weakness were seen in the global auto market.
The auto market is usually seen as an interest rate-sensitive sector, because rising rates make it more expensive to finance buying a car. Meanwhile, rising rates slow the economy, make consumers feel less secure in their jobs, and damage consumer sentiment.
The evidence of a slowdown is apparent in significant declines in used-car sales -- see CarMax's earnings report in December. Meanwhile, returning to Ford specifically, the company's November sales release, issued at the start of December, showed the extent of the slowdown in Ford's sales.
|
Metric |
August |
September |
October |
November |
December* |
|---|---|---|---|---|---|
|
Total vehicle sales (units) |
158,088 |
142,644 |
158,327 |
146,364 |
179,279 |
|
Retail sales change, YOY (units) |
29.7% |
(11.7%) |
(18.6%) |
(15.8%) |
(2.3%) |
Data source: Ford Motor Company.*released on Jan 5
So what
The deteriorating demand environment came in a year when one of Ford's biggest problems was the supply environment. Automakers have been grappling with rising raw material and supply chain costs, not least from a lack of component availability, such as automotive chips. These issues were carried over from 2021 and then exacerbated by the conflict in Ukraine in 2022. Consequently, Ford suffered a combination of rising costs and production cuts in 2022.
As such, Ford is having to raise prices to offset cost increases at the same time demand is waning -- so it's not hard to see why sentiment turned negative on the stock in December.
Now what
With the bad news out of the way, there are still some positives for the stock in 2023. Trading at just 5.6 times estimated 2022 earnings, Ford's stock doesn't look expensive. Moreover, the supply chain issues should ease through 2023; massive investments have been made in ramping up automotive chip production, for example. Meanwhile, the narrative around interest rates is encouraging investors to worry about future demand. Still, if the rate increases finish by the end of the year, the discussion will turn into an improving demand environment.
All told, the case for the stock rests on the idea that all the bad news is now in the price and investor sentiment will turn on the stock as supply chain difficulties ease while the interest rate environment improves in the back half of the year.
