Normally, if an industry goes south, so would companies in that industry. But Ford Motor Company (NYSE:F) seems to think otherwise. The company just told analysts that even if auto sales plunge 30% in one year, F stock could still stay profitable. Does that make Ford stock a special one in the auto industry?
Is Ford Stock Out of the Doldrums?
In case you haven’t noticed, Ford stock hasn’t really been a hot commodity these days. The stock slipped 8.6% since entering 2016. In the past 12 months, Ford stock is down more than 22%.
Note that the auto industry has been doing more than fine in this period. As the U.S. economy recovered from the financial crisis, both the jobs market and gross domestic product (GDP) data kept improving. One beneficiary of the improving economy was auto sales. Adding in low gasoline prices, last year was tremendous for the auto industry.
In 2015, U.S. auto sales reached a record of 17.47 million vehicles, breaking the previous record of 17.41 million vehicles in 2000. (Source: “U.S. Auto Sales in 2015 Set Record After Strong December,” Reuters, January 5, 2016.)
Ford also did well in this period. The company generated record pre-tax profit of $10.8 billion in 2015. Adjusted after tax, earnings per share also improved significantly, from $1.34 in the previous year to $1.93. (Source: “2015 Full Year and Fourth Quarter Financial Results,” Ford Motor Company, January 28, 2016.)
But some investors are still worried. What if last year was the peak for the auto industry? How would car companies perform when sales slow down?
Well, according to Bob Shanks, chief financial officer at Ford, the company would still be fine. (Source: “Ford Says It Could Make Money If U.S. Auto Sales Fell 30%,” Bloomberg, March 22, 2016.)
Shanks admitted that the company was in bad shape years ago, but assured investors, “We are a much different company now.” Here’s the impressive part: even if U.S. auto sales plunge 37% from last year’s record, Ford could still break even.
In a slightly better scenario, if industry sales decline by 30%, dealers’ stock of cars drop 27%, and net revenue slips two percent in the first year of a downturn, Ford could still be profitable.
The key to surviving potential downturns is being nimble. “We would adjust production to fit demand and do that very, very quickly,” said the CFO. Under such a scenario, Ford could cut its costs by $3.0 billion in the first year, including $1.0 billion in manufacturing operations. (Source: Ibid.)
Ford has already shown its ability to adapt to changes in market conditions. For instance, when demand for small cars declined last year, the company swiftly cut a shift of workers at its Michigan small car plant. (Source: “Ford to Lay Off 700 Workers at Plant Making Small Cars, Hybrids,” Bloomberg, April 23, 2015.)
The Bottom Line on Ford Stock
Today, Ford stock trades at $12.98 per share. The company also pays a dividend with quite a handsome yield of 4.65%.
Moving forward, Ford plans to maintain its dividend, even if the auto industry experiences another downturn. The company also plans to keep its investment-grade credit rating and continue its investments in new models.
It’s not easy to say whether the U.S. auto industry has peaked or not. But Ford stock seems to know the way out of the doldrums.