The market hasn’t repeated on its 2017 success in 2018. But the trend-line is still up. The S&P 500 is up about 2.5% year-to-date.
That hasn’t been the case with American auto manufacturing giant Ford Motor Company (NYSE:F). Year-to-date, Ford stock has dropped roughly 11%.
The culprit behind the sell-off in Ford stock has been a convergence of headwinds — which together weigh on the near and long term outlooks for Ford’s business. Ford’s vehicle sales in China are down big this year, a sign that the big growth potential in this massive market may never be fully realized. Ford’s U.S. sales are also down big this year, a sign that tightening credit is weighing on demand. Moreover, Ford had to halt production of its most popular and profitable vehicle, the F-150, due to a parts shortage caused by a supplier fire in Michigan.
Unfortunately, things aren’t going to turnaround for Ford anytime soon.
Through the remainder of the year, F stock will likely continue to under-perform the market. Moreover, over the next several years, Ford stock’s under-performance will persist.
Why? Secular change is coming to the auto market, and those secular changes do not bode well for Ford stock.
Here’s a deeper look:
The Near Term Is Troubled
Things don’t look great for Ford stock in the near term.
After several years of red-hot growth, the auto market is finally starting to cool off. Rates are rising, and that means tighter credit, which usually reels potential buyers back in. Moreover, the auto market has been so hot for so long that it was due for a pullback.
Thus, the following numbers shouldn’t be too surprising: Year-to-date, U.S. unit sales at Ford are down roughly 3%. Over in China, they are down 21%. The China declines are exaggerated by import delays in China. But this part of an ongoing trade war saga between U.S. and China. Right now, that saga doesn’t have a clear ending, so China vehicle sales for Ford could continue to drop by a ton.
Meanwhile, Ford just had to halt production of its most popular and profitable vehicle, the F-150, amid a parts shortage. That production halt creates only mild near-term headwinds, assuming production ramps back up in a timely manner. Nonetheless, it is yet another headwind affecting Ford stock in the near-term.
All together, with a crumbling auto demand backdrop and production issues overhanging the stock, I don’t realistically see Ford stock heading much higher in the near future. It is trading only a few cents below its 200-day moving average, and that feels about right considering the waning demand backdrop.
The Long-Term Is Worse
Longer term, I am quite bearish on Ford stock.
Secular changes are coming to the auto market, and those changes do not bode well for Ford.
First, growth in the sharing economy implies lower car ownership rates, which in turn implies lower overall demand for Ford vehicles. For several decades, car ownership rates in the U.S. were rising thanks to the mass proliferation of affordable transportation.
But that trend has changed over the past several years. In a surprise turn of events, car ownership rates have dropped since 2010. Also since 2010, ride-sharing apps like Uber and Lyft have surged in popularity.
This is not a coincidence. Uber and Lyft decrease the necessity for individuals to own a car, especially for those that reside in dense urban markets. As the necessity to own a car drops, car ownership rates will fall, too.
This trend is still in its infancy, and over the next several decades, car ownership rates will continue to drop. That will create an adverse demand backdrop for Ford, which should in turn keep Ford stock depressed.
Second, the electric vehicle revolution is upon us, and in the new EV-dominated auto market, Ford will face a lot more competition. Granted, I do believe that Ford will be able to transition its business to an EV-dominated auto market, but it is highly unlikely that the company maintains current market share. Instead, this shift to EVs will allow for new market entrants, like Tesla Inc (NASDAQ:TSLA), to steal a ton of market share away from Ford.
At the end of the day, then, Ford will be taking home less market share in a smaller market. That is a recipe for disaster for Ford stock.
Bottom Line on Ford Stock
The narrative is broken, and the stock isn’t particularly cheap relative to historical standards, nor is it trading significantly below where it has over the past year.
As such, F stock remains a sell, even at these depressed prices.
As of this writing, Luke Lango was long TSLA.