Ford’s Response to Doubters Is Awesome
Ford Motor Company (NYSE:F) stock soared on Tuesday after the company reported stellar sales in February.
Recall that only a week ago, Morgan Stanley analyst Adam Jonas slashed the price target for Ford stock. He argued that the receding U.S. economy could put a dent in automobile sales. (Source: “GM, Ford fall as Morgan Stanley analyst cites recession risk,” The Globe and Mail, February 24, 2016.)
Jonas’ argument would have held water if the recession fears weren’t overblown. There’s an interesting economic factor in play in favor of Ford, which the analyst might have failed to see.
It’s true that low oil prices have shaken some of the most powerful economies, like Russia and Saudi Arabia, to their core. It has brought smaller economies, like Canada and Venezuela, to the brink of a collapse. In the U.S., corporations in the energy sector are now struggling to stay afloat. Bankruptcies have become a bitter economic reality.
The doomsayers are now predicting recession, citing lower consumer spending. It’s evident from the lackluster quarterly reports from virtually all of the big U.S. retailers. They are all pointing their fingers at lower consumer spending.
Yes, U.S. consumers are spending less on groceries, apparel, and shoes. But they are redirecting this spending elsewhere. Because, amid all of this mayhem, the oil rout has done some good for U.S. consumers.
It has added extra dollars to Americans’ pockets.
The weather is warm and mild. And believe it or not, Americans are out shopping. What are they buying? You guessed it—automobiles! (Source: “US car sales defy economy fears,” Financial Times, March 1, 2016.)
Ford has emerged as the biggest winner of this trend, hands down. The company posted the best sales growth of more than 20% this month, beating all other automakers in the country.
It’s interesting to note here that a peculiar shift in consumer tastes is working in favor of the company. Affordable SUVs are seeing a strong demand from the young and old alike. In fact, Ford predicts that by 2020, 40% of the automobile market will be ruled by SUVs. (Source: “Something baby boomers and millennials agree on: SUVs,” MarketWatch, December 5, 2015.)
In order to claw at the maximum market share, Ford is cleverly planning ahead of time. The company is particularly focusing on this market through a competitive product offering.
Take, for instance, the “Ford Edge” that has turned out to be a big hit in the U.S. In February alone, the SUV pulled in a solid 91% sales growth. The Edge SUV has also been a success in Ford’s next big market, China.
Case in point: not only are economics in favor of Ford stock, but demographics are as well. The Morgan Stanley analyst might have missed the mark here. Monday’s rally in Ford stock has taken it way above Jonas’ price target of $12.00.
The Bottom Line on Ford (F) Stock
There’s a massive oil glut and none of the oil-producing countries is ready to cut output. It’s virtually certain that oil prices are not going up anytime soon. And $70.00-per-barrel oil is almost an economic impossibility now.
Despite the rise of electric vehicles (EVs), especially from the likes of Tesla Motors, it wouldn’t be wrong to predict that low oil prices will continue to drive demand for ICE (internal combustion engine) cars. Ford will remain the biggest winner for being the second-biggest automaker in the country, with a wide product offering that caters to all consumer tastes.
With a robust 4.2% yield, Ford stock is one dividend aristocrat I would love to pick for my retirement portfolio.