It might be tempting to take a swing on Ford (F) as the stock has had a very weak performance as of late. Three months of declining sales does not make for a good fourth quarter.
Ford reported an 8.8% decline in total December US sales. This might not be that bad were it not for the declines in both trucks and SUV's. Trucks and SUV's are where Ford has been able to bolster its income despite generally weak performance in every other segment.
This isn't the first time that trucks have weakened during the fourth quarter and I fear it bodes ill on their upcoming fourth-quarter results. This is not necessarily to say that we're going to see losses. There are avenues for the company to have cut expenses and they have done pretty well in terms of maintaining earnings, but the overall lower sales implies we won't be seeing any fireworks that kick the stock price back into a bull run. I hope you enjoy the dividend; because that's all you're going to be getting out of Ford in my opinion.
Crossovers are failing, trucks are everything
Seemingly the chatter amongst carmakers to make their stories sound better has been that crossover demand is largely taking over for traditional sedans. If that's truly the case, then Ford is missing out on the action. Sales of its popular Ford Escape crossover declined 23.3% in December. The car's sales are down 11.7% for the year. The vehicle was down 14.3% in November, and over 11% in October. The Ford Explorer (not a lot of exploring can be done in a car with less than 8.7 inches of ground clearance) was down 22.8% in December, 17.8% in November, and countered somewhat with 12.5% growth in October. For the year, the Explorer is down 4.3%. These two cars are their biggest selling crossovers. The decline is not a good marker for Ford's fourth-quarter health.
I won't even touch on the 27.8% December decrease in traditional car sales. The company has said multiple times that they're phasing out this end of their business in America. That very well may be the case, but if crossovers don't make up the difference, there's going to be a real problem here. When you consider that Jeep sales in their crossover and SUV lineup increased in December, I think Ford is actually losing market share. Total SUV sales for 2018 increased a rather stagnant 0.1%.
Through 2017 and the first half of 2018, weaker demand trends have been offset by a resiliently strong performance by the company's truck division. Trucks carry much higher transaction prices, and are really the source of Ford's money. As long as they stayed strong, the company could relatively maintain its financial performance. Unfortunately the fourth quarter seems to marking an end to the truck growth story. The coveted F-Series lineup of trucks experienced a 1.8% decline in sales in December. In November they fell 0.9%, and 7.3% in October. Collectively, the F-Series is up 1.4% on for the year. In the three months comprising the fourth quarter, total truck sales fell 4.9%, 2.3%, and 3.8% respectively. As with the F-Series, the total truck segment finished the year up 1.4%.
What does all this mean for fourth-quarter earnings?
I think we're about to see disappointment. Ford has been pointing toward higher transaction prices, and the potential of new Ford Explorer and Escape models later this year, but those cars are a ways off. Furthermore, the higher transaction prices of $38,400 (a $1,600 increase over last year) are certainly a positive, but the declining overall sales suggests that the pricing will only soften the fallout.
When you look at what's happening with trucks in general, it's becoming abundantly clear that Ford may very well be losing its dominance. When Ford was losing sales in December, Ram increased its sales by 37%. The big names seem primed to contend even more in 2019 for the incredibly lucrative U.S. truck market, as overall auto demand seems well past its peak in the current cycle. With a lot of the big names bringing out new pickup models this year, I expect the competition to get intense.
Low valuations and cash are the saving attributes
Auto stock performance has made it very clear that markets are not going to be kind. Car companies trade at incredibly risk averse valuations, and I don't think Ford's sales declines are going to allow them to produce any surprises big enough to drive the shares up.
Ford's saving graces right now are the large amounts of cash on hand and that cheap valuation. That protects it for now, but the immense long term debt of nearly $103 billion is a nagging concern. If the auto industry shifts to losses at some point in the next two years (something that usually coincides with recessions), the combination of rising interest expenses with lower revenues would almost certainly damage Ford immensely.
The bottom line is the stock has a lot of "what if's." The company has relied heavily on trucks through the past two years, and it just finished the fourth quarter with weaker overall truck sales. That's a bad sign -- plain and simple. Aside from that big dividend, there isn't much here to excite me. I don't view it as a wise stock to buy right before it reports earnings on a quarter where its gravy train pickup trucks just experienced softer sales.