Ford Motor Company (F) can’t seem to catch a break. Ford stock has been declining over the past year despite the company’s strong sales reports. This week, the automaker announced all-around solid fourth quarter results, but markets were reluctant to give Big Blue any credit.
The response to Ford’s earnings report raises the question: What will it take to get Ford stock out of its slump?
It doesn’t look like earnings will be enough. Ford’s fourth-quarter earnings painted a relatively strong picture of the company’s performance, with the automaker earning 58 cents per share in the final three months of 2015 — besting estimates by 7 cents.
While Ford enjoyed solid profits in North America, Asia and Europe, the firm lost $295 million in Latin America as the region’s economic troubles weighed on sales. Still, Ford reported record annual profits of $10.8 billion as the U.S. car market experienced a stellar year.
However, despite the upbeat report, investors remained skeptical, and F stock saw very limited gains.
Normally, you’d expect investors to look at such a strong year and buy into the company’s potential, but Mr. Market has been stubborn so far, and traders remained dubious about Ford’s future prospects.
For one, the company cautioned that profit margins in its ever-important North American arm may not live up to the 10.2% achieved in 2015. Instead, the firm is expecting to see 2016 profit margins of 9.5% or better.
But the main reason Ford stock has been suffering is fear — investors are worried about the auto industry in general, so Ford performing well at a time when the U.S. auto industry reported a record-breaking number of new car sales wasn’t enough to calm their fears.
How Can Ford Stock Make A Comeback?
Much of Ford stock’s slump has been based on investor sentiment rather than hard data, so there are several scenarios in which the company’s share price could break out of its rut.
Perhaps the most obvious would be an improvement in the Chinese economy. Not only is Asia one of Ford’s most important markets outside the U.S., but the company has also just finished an extensive expansion into China. Now that Ford’s new Chinese factories are up and running, there is a lot of concern about whether or not they will be profitable given the uncertainty surrounding Beijing.
At the moment, the slowdown in China is manageable for Ford as the company can trim its spending by cutting production. But if things continue to move downhill, Ford’s expansion efforts may become a drag on the automaker’s bottom line. While Ford’s 2015 earnings showed a strong performance in Asia, investors are likely to remain cautious until economic conditions improve.
Credit Risk
Outside of China, the other major issue that has weighed on investors’ minds has been the Federal Reserve’s interest rate hikes. The bank’s decision to increase interest rates at the end of 2015 has raised questions about whether or not the auto industry will feel the squeeze from subsequent hikes in 2016.
Higher interest rates make loans more expensive and deter people from buying new cars, and they could even impact Ford’s own credit arm. The company’s finance chief Robert Shanks has said that the pace at which interest rates will rise should have a minimal effect on the company’s lending business, but that hasn’t stopped investors from worrying.
Ford stock isn’t alone in suffering from investors’ panic over the Fed’s rate increases, but no amount of reassurance from Ford itself is likely to calm fears. Instead, time and patience will be the only remedies as traders will probably come to terms with a changing rate environment once the Fed proves its dedication to keeping the pace of rate hikes slow.
What Ford Stock Needs for a Recovery
While it may seem counterintuitive, a difficult year for automakers may be just the thing to help Ford stock to break out of its slump. Ford’s ability to perform during a record breaking year has proven very little to investors, but a solid performance at a time when U.S. auto sales aren’t so sparkly could turn sentiment around and give the carmaker some clout among traders.
Just because the rest of the market is unwilling to give F stock a chance doesn’t mean you shouldn’t. Ford’s balance sheet shows a strong cash flow, and the company is likely to continue enjoying strong sales in the coming year, so it’s not a bad long-term investment option. The company’s financials present a compelling case for a long-term buy, and Ford stock also offers a hefty 5% dividend yield that somewhat makes up for a long wait for share price increases.
Now is a good time to buy in at the ground level as the company’s solid performance suggests that it will only be a matter of time until sentiment catches up.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
