“Horror
story” you say? Kevin Burns, Juul CEO, comment reported by whistle-blower lawsuit citing “contaminated nicotine pods. Burns; “Half our customers are drunk and vaping like mo-fos, Who the fuck’s going to notice the quality of our pods?” It’s a horror show, when your company’s CEO attempts to make up for lost fruit-flavored revenue by purportedly shipping “contaminated nicotine pods.” And referring to customers as addictive drunks? It’s all good bro.
O.K., so does Ford’s trunk load of troubles still seem so horrific? Well let’s see. The share price hasn’t ceased dropping since they reported last Wednesday. Sedan sales dropped 29% in Q3. Don’t forget looming talks with the UAW. And then there’s this comment. “Moderate, strong, and stable.”
That’s what Powell said yesterday as he cut the rate for the third time. “Moderate growth, a strong employment market, and stable inflation.” Hold-up. What’s the chatter about the holidays and retail sales and the health of the last leg standing–the U.S. consumer? “Stronger than last year.” And Q3’s GDP? 1.9%. Taken together, that’s not all bad, and neither is Ford. Let’s look at “Ford Fugly. Can You?”
Q3
EPS was effected by four main factors; restructuring spending, increased warranty costs, China sales, and high incentives/promotional spending in the North American market. Q3 includes the roll out of the new year’s models. The redesigned Ford Explorer now features a rear-wheel drive, and a hybrid power plant. These redesigns required a refit of 96% of the factory’s work stations, a massive and hyper-expensive overhaul.
With every overhaul comes snafus. This time it was loose wire harnesses, “un-activated” info systems, and defective seats. Many vehicles were effected. The new Explorer is not being built in Detroit, but rather Chicago. Yet the Chicago operation is unsuitable for managing such a manufacturing fix. Zero parking around the facilities is one issue. Vehicles were instead sent to Michigan. Meanwhile North American dealers attempted to sell invisible Explorers to expectant toe-tapping customers, and thus incentives were mandatory to placate the wait. Never good.
Ford’s
issues come bundled, like cable. Cable’s fugly right? But it’s all baked into a nose-bleed price. F’s Fa King cheap–again like dirt. The auto business is weak. Volkswagen just said so in their Q3 report. Ford’s in an expensive turnaround mode. An on-going trade war leaves their China business vulnerable, and again weak. The company’s up for UAW contract renewal talks.
Now a civil war has broken out within the auto industry regarding emissions and fuel efficiency standards. California promises to take this one all the way to the supremes. Industrials are out of favor. Ford’s an industrial. Wait. Over the past month the Industrials rank a strong fourth out of eleven, up 3.85%, a full 1.1% above the bottom six economic sectors. Is that hated? Not exactly. Now this market’s lavishing its’ true hate on the “safe haven” plays; Consumer Staples, -1.05% and Utilities -0.23%. Hum. What does Ford have going for it now?
Ford’s share price is bottoming, and now being supported by their super-fat dividend. AT&T, a splash of REITs, and the out of favor oils, are the only plays with a dividend so high. What else? F’s now absurdly cheap, revalued cheap, florescent cheap, maybe even near de-risked cheap. F also dominates the U.S. truck market, and sells a lot of very popular SUVs. Oh, and they know they have problems, and are addressing them, vigorously. Think new hybrid and EV models–more than GM. Oh, and they have a blueprint for dealing with the UAW. Think GM’s deal, and the UAW probably doesn’t want to dive directly into yet another strike.
Last
summer the EPA and the National Highway Traffic Safety Administration pushed to freeze fuel efficiency standards at 2020 levels until 2026. New proposed standards call for only 37 mpg by 2026. Back in 2012 under the Obama Administration CAFE standards called for 46.7 mpg fleet-wide by 2026, along with annual fuel efficiency increases of nearly 5%. The Trump Administration has in turn sought to erode this standard.
So called “headline” risk is real. Increasingly it’s clear. People care about the environment. Ford, Honda, BMW, and VW have sided with California to build to the toughest fuel efficiency and zero-emissions standards in the country. Neither the Sierra Club or the Union of Concerned Scientists are targeting Ford.
The proposed changes to standards affect auto manufacturing, and it’s dividing both manufacturers and states. The above four side with California. On the opposing side now sit GM, Toyota, Hyundai, Fiat Chrysler, Nissan, Mazda, Kia, the National Automobile Dealers Association, and Subaru. Subaru–really? Their entire persona is centered around the outdoors. Just look at their ads. And the states siding with softer standards? Texas, Ohio, West Virginia, Alabama, and Utah, have joined the administration citing “increased automobile costs.”
Congress
is watching. “Instead of choosing the responsible path, one forged by four automakers and the state of California, one that will lead us toward the cleaner alternative fuel vehicles of the future, they have chosen to head down a dead-end road.” –Ton Carper,(D) Senate Environment and Public Works Committee.
Ford reported last Wednesday, the 23rd. Excluding restructuring costs F posted a 31% Non-GAAP EPS beat of $0.34 vs. $0.25 estimate. The EPS post also represents a 17.2% increase over Q3 last year.
AT $8.53, Ford now sits near recent technical support, $8.55 set on October 3rd. Ford’s longer-term bottom is $8.28 on February 8th. Months ago we suggested shares could hit $8.30. On Balance Volume analysis shows a shift to accumulation. That comes against the declining slope of every EMA, and a new bearish MACD cross below the signal line. So why talk about it?
Outright rejection, dumping, and ugliness can only go so far and Ford may be there now. Look around. The Ford Quad cabs you see didn’t come from outer space. Nor will the 2020 models. “Baked in and bottoming,” is the operative phrase. Think Boeing. If your CEO is slowly turning on the congressional spit and share prices are rising, simultaneously, it seems like a bottom, or very close.
If you enjoy being paid, well, to wait, you should think Ford here. High-multiple growth is now a grab bag of “what the hell?” Frankly, we’re sea sick from the savage reversals. Can you buy Ford? We’ve scaled in as F’s dropped. Is it safe to buy Ford? It’s much safer now. Scaling-in from here is much better then when we began. We’re too eager that way. We still own Ford. Owning it here is the same as buying it here. As always good luck and good investing.
Jam of the Day
Chet Baker “You go to my head.”
https://www.youtube.com/watch?v=-XXFqAa0jgo
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