Thomas Niel


Investors already know earnings are going to be bad and have oversold F stock

With earnings coming out next week, should you buy Ford (NYSE:F)? The automaker has seen its share of trouble from the novel coronavirus. With its auto plants sitting idle, expect them to continue burning through cash until we get back to “normal,” which doesn’t bode well for F stock.

Based on numbers recently released by the company, cash burn could be over $5 billion per month. The automaker has built up a solid cash position to ride things out. But, let’s just say 2020 isn’t going to be a great year financially.

So, why buy F stock? Especially now, just before earnings? Despite the plethora of bad news, shares today could be “priced for disaster.”

In other words, shares may have been oversold relative to actual risks. Sure, shares could go lower in the near-term. But one to two years out, buying F stock today could be a shrewd move in hindsight.

F Stock, The Pandemic, and Earnings

Ford reports earnings for the first quarter (Q1 2020) on April 28. But the company has already provided numbers. And they aren’t pretty. The company expects a net loss of $2 billion for Q1 2020.

Yet, investors already knew things were going to be rough for Ford this quarter. As a result, shares haven’t fallen much further on this news.

Since the preliminary earnings announcement on April 17, F stock has fallen from $5.17 per share to $4.77 per share. In other words, around a 7.7% drop. That pales in comparison to declines during the pandemic-driven sell-off.

Ford shares started falling off a cliff in early February, cratering from around $9 per share to as low as around $4 per share, before slightly rebounding in wake of the $2 trillion stimulus package.

We may have reached a bottom with F stock. Even if scary cash burn numbers make it look as if shares have a long ways to go before bottoming out.

The company’s CFO says Ford has enough cash to last until the end of Q3 2020 (September 2020), assuming factories don’t reopen. Based on a Bloomberg Intelligence credit analyst’s calculations, the company has gone through $8 billion so far in 2020.

But cash burn could be more severe as the shutdowns continue. Given the automaker had $30 billion left as of April 9, and the end of Q3 is 174 days after that date, the company is probably losing around $5.2 billion-$5.3 billion a month while plants sit idle.

Darkest Before the Dawn

Re-opening an auto plant post-pandemic isn’t going to be same as re-opening a restaurant or bar. Given the power the UAW (United Auto Workers) union holds over U.S. automobile production, they are yet another stakeholder who must sign off on resuming operations.

Ford and its “Detroit Three” (legacy automaker) peers General Motors (NYSE:GM) and Fiat Chrysler (NYSE:FCAU) recently met with UAW representatives to discuss a restart timeline.
No concrete restart date came out of it. As union officials remain fearful of the pandemic spreading on the factory floor, it’s hard to tell really when auto plants can resume production.

Yet, don’t let this factor scare you off of F stock. I know what you’re thinking, “$5 billion a month in cash burn?” Even if it’s a short-term issue, the company could be carrying this additional debt for quite some time.

And you would be correct. Ford is borrowing hand-over-fist to boost its cash position. Using borrowed money to cover losses, the company is going to be more levered than before.

Yet, this may not a problem for those buying in at $5 per share and below. As mentioned above, shares have been oversold as bad news piles up. That means the potential upside in Ford’s stock price if and when the auto industry rebounds outweighs the risk shares go to zero.

Shares could dip further from here in the short-term. But, the risks of a Ford bankruptcy are less than you think. As Morgan Stanley analyst Adam Jonas discussed on CNBC in late March, the auto maker’s efforts during the pandemic (manufacturing respirators, etc.) serve as a “good tactic against bankruptcy.” With the Detroit Three doing their patriotic duty, it will be tough for Washington to refuse a bailout if government intervention winds up being their last lifeline.

Consider F Stock at Today’s Prices

Ford may be losing billions a month as their plants remain shut down. Yet, shares could be a buy at $5 per share or below. Given all of the bad news as of late, investors have oversold the automaker’s shares, considering the remote chance of the stock heading to zero.

Given the high risks involved, don’t bet the ranch on F stock. But with shares close to the bottom, today’s prices could be a solid entry point.

Author: Thomas Niel

Source: Investor Place: Earnings Aren’t Going to Be Pretty, but Buy F Stock Anyway

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