UPDATE; August 7, 2019–
caught an upgrade from Equal to “Overweight” yesterday, August 6th, from Morgan Stanley analyst Adam Jonas. Why the change? The upgrade was driven by the company’s “restructuring, strategic actions, and better product mix,” Jonas stated. Right in line with Sj’s premise of Ford being a rare value, in turnaround mode, and be paid-to-wait 6.3% dividend play,
“Our previous concerns over Ford’s ability to maintain its dividend payment have largely subsided. Our earnings outlook implies free cash flow in line with or exceeding the dividend payment.”–Adam Jonas, Morgan Stanley.
The analyst’s forecast now calls for “stable profitability” of $1.20 to $1.30 a share through 2022. That outlook was influenced specifically by “incremental restructuring savings.”
No mistake. Autos are a challenged industry, one which the new tranche of tariffs won’t help. Yet, the past two days have shown Ford as a market survivor, if not leader. Monday’s blood bath up barely touched F, down 0.5%. Tuesdays rally saw Ford up over 2%, a very big move for Ford, or any established industrial. Nice, very nice.
There’s more good news. Ford now sports an “investment Grade” credit rating from all the major credit rating agencies. But then so did entire stacks of dog crap CDO’s during the sub-prime credit crisis. There’s more. Morningstar now states that “Ford pays a good dividend that we think’s safe in a downturn, and will likely often pay a special dividend.” Yowser.
We believe shares will nonetheless continue to drift lower, if not much lower. Shares could challenge the January low of $8.29, representing another -12.3% from the current $9.46 pre-market Wednesday. The price-action suggests both value and dividend investors are supporting the price. We’re practicing patience. This story will require time. Scaling down will continue to be our way–in wide scales.
AUGUST 2, 2019
end always seems near when the calendar opens on August. Who doesn’t feel it? The pool splashes on, but not the same. Seasons’ change fills the air, and it fills the air for Ford.
It’s been 116 years since the T and 57 more since the Mustang. Every Ford from then to now has been pushed by gas. Gas is now sad. As the planet chokes the auto industry shambles for form–compact, roomy, sedan, gas, big, small, diesel, shared, hailed, hybrid, or EV. It’s the menu at McDonald’s.
Some say the Germans are in the lead, again, soon to be offering real choice. The Chevy Volt’s a joke, and the Toyota Prius isn’t. The Tesla galaxy’s in trouble. Musk’s on a leash, as is our Great Electric Hope. America’s need is grand and we hate limits. Besides, where you gonna plug-in?
Ford’s trucked between the battery technology rock, and the environmental hard case. Meanwhile the company lives on big products that rely on cheap gas. Now they’re livin’ on a big dividend promise as well. The vice is closing, socially, despite the price of gas and the shale revolution. If it runs on gas its’ time is running out. Ford. Fabulous Still?
Iacocca’s vanished now, as has much of the magic of the identity ride. Or so it seems. Everything changes. “Ride sharing” you say? How ’bout sponge sharing? Password swapping? FICO score subscriptions and protein rental? So what do we have? Rental university degrees? Gated “rental communities,” with subscription neighbors? Rental Q-Tips and pickup trucks with $90,000 MSRPs? The death of sedans? Yeah. Volkswagen back in the fold after emissions cheating the planet? Um-hum. Used car vending machines and third-party food from anywhere–Jesus H. Christ. Who wants a burrito that’s been on a mystery tour?
Yes–we know what you’re thinking. Ford—and a batch of new China tariffs? Don’t forget the UAW trouble either. WTF? Q2 was a box of fugly. The China division is in chaos. And? And Ford’s an industrial. What’s not to hate? Industrials are cyclical too, in part by definition. More? Here’s more. This July marks the 121st consecutive month of U.S. economic expansion–some say the longest since the beginning of record keeping in 1854. How can that go on? More importantly, how can Ford be expected to restructure it’s entire global business, if its’ home base market of North America, falls out of bed?
Over his entire career Warren Buffet has bought things that smelled like pure taint, only to see them in time turn in to gold. If you want great concert tickets, you don’t buy them at the box office that night. You scan for the guy near by. When the market loves something, that love’s priced in. If you want it at a price, buy it when it’s hated, and looks very wrong, and the technicals are pure rot, and the share price is beaten bloody, and the dividend’s inflated like a Botulinum balloon.
Think newly-hated restructuring Ford, fresh off a door-removing sideswiping quarter, offering a 6.3% dividend. It’s like a crack-addicted live-in brother-in-law with sprawling computer skills. Current Morningstar Fair Value Estimate $12.00. Really.
things change. Ford’s HQ hasn’t, but basic American fundamentals do. In America the home and the automobile are the land and the sky, earth and sun, air and water. How we do each is shifting, radically. Gas power is on a slow rotation out, and people even in medium-sized cities believe renting is cheaper than owning. “Hidden costs,” they cite. Hum. Maybe. And car ownership? Let’s just share–O.K.?
Shifts in cultural thinking are shearing big pieces off of Ford’s very business. Remember the sedan? Think. Seems quint now–already. It’s an endangered species. Keep in mind that Ford’s big in Europe. Their passenger-oriented offerings on the continent are small, but their presence there has been big, for years. And just about everywhere else. Yet now Ford’s saying things like “Whatever it takes” to return to profitability. This from a $37.1 billion company.
“Mobility” spending is the shiny new term for industry investments in autonomous driving, ride-sharing, and ride-hailing. Everybody’s doin’ it. In Q2 Ford did it to the tune of $264 million, up from Q1’s $181m. Is that a lot? Doesn’t sound like a lot to invest in your future, while shareholders are tossing beers from the stands.
Ford, GM, Fiat-Chrysler–Fa King everybody’s headed through the same meat grinder. We know this: It’s all going hybrid/electric, at least first. Hydrogen? Not soon. Fewer vehicles will be produced. Share that thing. Autonomously-driven vehicles will take much more time, and infrastructure. 5G is the key to that.
Ford Motor Company.(NYSE:F) 7-31-19
in the road for Ford? Hybrids, EVs, then autonomous. The latter’s not close. That will take more infrastructure than we can imagine–vastly more; small and ubiquitous Wi-Fi pods, a staggering network of server farms, and the power to run said. Hybrids work now and Ford has those, including the new Lincoln Aviator. Electric vehicle recharging infrastructure is barely on the stove. Range is by far the single limitation to mass adoption. Well, price also. Battery technology will take what? Right, more time. And car battery fires, and first responder electrocutions? Problems both. The shale revolution has mostly crippled OPEC. U.S. petroleum production is only increasing. Gas power will hang for a while. That’s good for F.
North America is home base to Ford. Ford’s bread is buttered here. Think SUVs and pickups of course. They hope “restructuring” will raise their EBIT margin here from a current 7.1% to 10%. Hum, that’s a 40.8% jump. What does that look like? Only doing what pays and technology partnerships.
Gasoline power may be primitive and increasingly hated, but there is no viable scalable alternative now. Gasoline prices will not be driven higher systemically anytime soon. Thus a wide transition to electric will be slower, allowing Ford some time to retool. Think two pie wedges facing in over-lapping fashion. Ford suggests 2023 for their broad roll-out of electrics, even though they offer many hybrids now. Right now F’s paying you 6.3% to wait for development. Income investors love being paid. We do too. And Ford? They need your money to make that move. Thus, they don’t want to cut the dividend. Besides, it reeks like failure and reads like betrayal.
anyone bother to tell you about the bacterial load located in the backseat? All cultural shifts aren’t lovely. Cabs are licensed. That means they must meet certain standards, supposedly. Studies, some study, purportedly found a seething bacterial load of greater than 5x in the passenger area of Uber rides–5 times the bacteria of a common big city cab. Cabs have seats that can be cleaned. Cloth–not so much. Ever clean you car’s cloth seats? Who knew? Ownership has it’s benefits.
a company busy positioning itself to survive. They’re replacing 75% of their products by 2020. Wow. The “Global Redesign’ is led by a shift to higher margin vehicles, while lowering capital intensity. Their product mix is much better already. Capital intensity reduction? Think development partnerships. “Smart vehicles for a smart world. Compounding positive effects takes time.” CEO Jim Hackett.
Q2 evoked raw rage and waves of revulsion selling, and full year EPS guidance of $1.20 to $1.35. That misses the $1.39 consensus by $0.04. The range’s midpoint would also result in an annual EPS decline from FY2018’s EPS of $1.30. F shares are now more than 7.45% cheaper. Yeah. F was cheap before, rightly so obviously. Fact. Ford is dirt-cheap now, selling at 1.1x book value, for a turnaround story, with one foot already in the door.
Why all the Q2 ruckus and upset? Ford’s full year ’19 guidance pegged $0.04 below consensus, implying a slight EPS decline from last year. Year-over-year EPS contraction never pleases. How cheap must F go before appealing as value? Not much, or none.
Hackett–“China is persistent stress.”
That’s candor on an unusual level. China is the cause. Yet Ford’s consolidated Chinese revenue is up by 48%, led by Lincoln. A lux brand leads? Again, wow. “We have the lowest inventory levels in 18 months there.” Excess inventory’s just idle money. The trouble’s in the Chinese Joint venture dealership and marketing businesses, both in chaos, and the company added zero color on either. “Turmoil in leadership” seemed the story for JV China, including a murky comment concerning a “sudden retirement for personal reasons.”
Perhaps though, the most shocking, F reported a home base North American EBIT showing a 30 bps decline, despite a higher margin product mix–oops. Not good. Oh, and an EPS consensus miss, on 0.2% declining revenue. Oh boy.
Ford Motor Company. Q2 press release–
“Overall, Ford’s reported net income was $148 million, net income margin was 0.4 percent, and earnings per share (EPS) was $0.04, all down as a result of ongoing global redesign and restructuring activities, primarily in Europe and South America. Those initiatives accounted for $1.2 billion of charges for special items.”
“We saw a strong mix in pricing off-set by lower volumes. We had strong pricing in every region. Our F-Series lead North America, with the new Explorer production being over-subscribed. We sold every one we could build.”
Good news. Q2 marked the first time in three years that the company linked quarters of EBIT growth in Automotive. Nice. Tech companies do that constantly. Industrials far less. It’s a cyclical gig. The quarter posted 19% EBIT growth y/y.
addition to the new F-150 Raptor, 2019 is also introducing the all-new Explorer, the Police Interceptor Utility we showed earlier, a new Bronco, and the Lincoln Aviator–available in a plug-in hybrid version. Additionally, Europe received the new Ford Puma compact crossover. The company is not “re-vamping” it’s product line. It’s replacing 75%. Again, time, this will take time.
Meanwhile, F just posted a -0.5% market share loss, and sold 12% fewer wholesale units YTD. Reverse is not Drive. Nonetheless, cash flows from operating activities rose by $1.5 billion. That’s up from $8.5b. to $10b., or 17.6%. Hum. Fewer vehicles to fool with, more money. How can that be bad, during a massive full-tilt transition?
Meanwhile, sales of the Ranger pickup truck “completely off-set the discontinuation in sedans” thus far, with Ranger segment share growing to 14.1% overall. Additionally, Ford won all three categories of the JD Power Truck Fuel Efficiency ratings. Clean sweeps are awesome.
On CFO Time Stone’s first call in that position, he rightly displayed pride in performance. “Adjusted free cash flow was up 80% on a year-to-date basis, our most important metric. $2.1 billion for the first half. That’s a rate above our targets of $20 billion in cash, and $37 billion in liquidity.” That’s nice.
Stone went on to state the quarter created the “best overall pickup sales since 2004.” The company’s consumer financing wing saw “healthy consumer credit, with an average customer FICO of 750.” Consumers buy, only when they’re strong.
Europe’s road map to full health is dumping includes what doesn’t work. “We’re restructuring looking to double EBIT in commercial vehicles, including launching the new 2 ton commercial van this year.” CEO Hackett stated that they would “soon reach compliance with EU emissions standards without buying credits or paying penalties.” Spears immediately came out of the analysts’ seats. The skepticism was audible. “There’s quite a gap between your current 120 gram emissions and the EU’s required Co2 limit of 95 grams by 2020.” Hackett stood his ground and insisted, “I appreciate the challenge, but we’re planning to make it.”
Slashing. Twelve-thousand salaried positions are disappearing. Sedans are the second thing Ford’s cutting. Sedans are ignored by truck and SUV loving Americans. Europeans use small sedans, but far fewer pickup trucks. Sedans will not die totally, as the company announced the new Puma for Europe. The ancient embracing back streets of Rome and Amsterdam never anticipated the Quad Cab.
and pedestrians abound in Milan and Paris too. Have a delivery? Those are handled by tiny vans covered in colorful stickers. Fat pickups won’t fit, and aren’t welcomed. Befuddled GM designers belatedly realized that Cadillacs had no place in Osaka or Tokyo. Whirlpool and Maytag had to learn the same thing about Japan. My god, all you had to do was Fa King look.
Ford’s copped a deal with VW which nets them access to the existing MEB EV architecture Volkswagen’s already using. Tiddy. The plan involves building electric commercial vans and medium-sized trucks on the MEB platform. Additionally Ford’s invested at least $500 million in Rivian, a maker of just that–electric trucks, SUVs too.
Senior Managing Editor Matt Delorenzo, of Kelly Blue Book says “Ford’s trying to lay off development and infrastructure costs. They’re relying on partnerships in both the electric and autonomous driving areas.”
SJ opened a small position when shares tumbled post Q2 earnings. We look for shares to continue drifting lower over this quarter, further magnifying the dividend yield. Depending on the price action and news, we plan to add to our position prior to the next Ex-Date. If shares lift, we have a sellable high-quality problem.
first came on board with Ford as an engineer. Quickly he realized tedium and then found his place. Ten years in the sales department and in 1956 he pioneered the “56 for 56” program. It was the first auto financing program; $56.00 a month for three years. The program went national. Ford Chairman Henry Ford II, being the dick he was, clashed with the brilliance of Iacocca and poof Lee was flash-gone. Kinda like Jimmy Johnson firing the coach who just got him a Super Bowl.
In 1978 Lee moved to save Chrysler. He levered cash from the federal government and worked to bring the company back from death, all as America closely watched. The TV spots were great. A true showman, Iacocca won America, and big K car sales. The extremely high-profile government loan was controversial. It reeked of a “bail-out.” Yet Iacocca made it look easy, and extremely savvy. How?
Iacocca tied it up nice and neat and with a bow, and full interest, by dropping the final loan payment on he federal desk seven years early. Seven. America gasped in Fa King awe while CEOs became reverent. Lee also took Chrysler to the heights of mammoth profitability. Iacocca became the most widely-known executive in American history, and a true book-selling rock star.
cheap is Ford now–exactly? Let’s compare it to the S&P 500′s P/E average over the past four quarters. On forecast EPS Ford trades for just 23.3% of the price of the S&P 500 benchmark. It sells for 25.3% of that benchmark on cash flow. And it sells for 11% of the benchmark price on sales. Those numbers mean you’re paying 23.3, 25.3, and 11, cents on the dollar for EPS, cash, and sales, relative to a 4Q average S&P P/E. Stealing is the only way to go cheaper. Those numbers are based on an 8-1-19 open of $9.53. As we write it’s now down 2.31% to $9.31, which is precisely why we only took a starter position. Wait. It’s getting cheaper.
Ford’s dividend payout ratio is unsustainable at 117.6%. AT&T’s(T) 5.99% dividend equals a payout ratio of 66.7%, while American Electric Power’s(AEP) 3.05% dividend creates a payout ratio of 66.3%. Fact. No company wants to cut, yet Ford may very well be forced. But let’s see. Besides, AT&T is a criminal recidivist. Stay tuned and geeked.
Do you think Ford’s done? If not consider. Ford will drift lower. At $9.31 Ford’s dividend is 6.3%. If you can find a more affordable dividend buy it. We’re always looking, but we will be paid this quarter by Ford. The next Ex-Date is months away. Do you think they can pay? Are you willing to wait? We are, while we watch the newest chapter of a true American classic, fighting for a future. Best wishes and good luck.
Jam of the Day
“What a Shame About Me”
When you feel good, it shows.
Thanks for Reading.