Ford’s Stock To Underwhelm After 67% Recovery

by Trefis Team
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Ford’s stock (NYSE: F) has rallied 67% since late March (vs. about 46% for the S&P 500) to its current level of $7. This is after falling to a low of $4 in late March, as a rapid increase in the number of Covid-19 cases outside China spooked investors, and resulted in heightened fears of an imminent global economic downturn. The stock is currently about 12% below its February 2020 high of $8. Are the gains warranted or are investors getting ahead of themselves? We believe that the stock recovery is justified but the stock price doesn’t have much  more room to grow. Our conclusion is based on our detailed comparison of Ford’s stock performance during the current crisis with that during the 2008 recession in our dashboard analysis.

How Did Ford Fare During 2008 Downturn?

We see Ford’s stock declined from levels of around $5.50 in October 2007 (the pre-crisis peak) to roughly $1.50 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 75% of its value from its approximate pre-crisis peak. This marked a drop that was higher than the broader S&P, which fell by about 51%.

However, Ford’s stock recovered strongly post the 2008 crisis to about $7 in early 2010 – rising by about 400% between March 2009 and January 2010, as against the S&P which bounced back by about 48% over the same period.

In comparison, Ford’s stock lost 50% of its value between 19th February and 23rd March 2020, and has recovered 67% since then. The S&P in comparison fell by about 34% and rebounded by about 46%.

Is The Recovery Warranted & Can We Expect Further Gains?

The rally across industries over recent weeks can primarily be attributed to the Fed stimulus which largely quieted investor concerns about the near-term survival of companies. While Covid cases are still rising in many parts of the world, the planned opening in phases of U.S. and European cities is also giving investors some confidence that developed markets have put the worst of the pandemic behind them.

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending, which would lead to lower demand for automobiles affecting Ford’s revenues. In the Q2 results the volume hit was confirmed as the company saw a decline of 53% in sales volume overall. Revenue fell by 54% to $16.6 billion for the quarter. Net Income improved to $1.1 billion as the company recognized a $3.5 billion gain on investment in Argo AI.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to boost market expectations. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations  become more important in finding value.

As the global lockdowns are lifted gradually, consumer demand is expected to pick up. The stock has recovered the amount it lost between February and March 2020, and investors’ focus is now primarily shifting to 2021 numbers. But with the uncertainty of the pandemic and its effect on the Automobile sector, we believe the stock will stay near its current level of $7. As per Ford’s Valuation by Trefis, the company’s fair price also works out to about $7.

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