Lessons From 2008 As Ford Navigates A Tough Economy

Ford stock (NYSE: F) currently trades at $10 per share, about 60% below the levels seen on January 15, 2022 (pre-inflation shock high), and it seems like it has some room for gains. Ford saw its stock trading at around $11 at the end of June 2022, just before the Fed started increasing rates, and remains down by 10% from those levels. In comparison, the S&P 500 gained close to 52% during this period. While Ford and major automotive players were impacted by supply chain issues and the semiconductor shortage through much of 2022, high interest rates and relatively weak consumer confidence in the U.S. have also hurt the company. Over Q2 2024, the most recent quarter, Ford saw its sales grow 6% year-over-year to $47.8 billion, driven by a fresh lineup of vehicles including the all-new F-150, although it fell short of estimates. Ford’s adjusted earnings also missed estimates amid higher warranty-related costs, coming in at $0.47 per share.

Looking over a slightly longer period, F stock has witnessed gains of 10% from levels of $9 in early January 2021 to around $10 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period. However, the increase in F stock has been far from consistent. Returns for the stock were 136% in 2021, -44% in 2022, and 5% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that F underperformed the S&P in 2022 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the mega-cap stars GOOG, MSFT, and AAPL.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could F face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

Returning to the pre-inflation shock level means that Ford stock will have to gain close to 151% from here. There are a couple of tailwinds for Ford stock, as demand for trucks and SUVs – which are typically Ford’s strong suit – remains strong. Separately, the EV market has been slowing down, with demand cooling. Slower growth in EV demand could give Ford more time to monetize its gas-based vehicles while investing in long-term electric vehicle developments. Ford’s valuation is also attractive. The company’s 2024 free cash flow is projected to come in at about $8 billion, meaning that it trades at just about 5x free cash flow.  However, there are macroeconomic concerns with U.S. jobs data coming in below expectations for last month, with fears of a recession mounting. We estimate Ford’s valuation to be around $14 per share, about 40% above the market price. Our detailed analysis of Ford’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: An increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.
• Since August 2023: the Fed has kept interest rates unchanged to quell fears of a recession and there is a possibility of rate cuts in 2024.

In contrast, here’s how Ford stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Ford and S&P 500 Performance During 2007-08 Crisis

Ford stock declined from a little over $8 in September 2007 to just $2 as of March 2009 (as the markets bottomed out), implying F stock lost nearly 75% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $10 in early 2010, rising roughly 5x between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Ford Fundamentals Over Recent Years

Ford’s revenues declined from $155.9 billion in 2019 to $127 billion in 2020 due to the impact of Covid-19 on the automotive sector, although they rebounded strongly to $176 billion in 2023, driven by a strong recovery in demand post-pandemic-induced lockdowns and easing supply chain issues. Moreover, Ford has also been able to prioritize higher-end vehicles and pickup trucks and this helped its average selling prices. Ford’s earnings rose from -$0.32 per share in 2020 to $1.08 per share in 2023.

Does Ford Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Ford’s total debt excluding its financing operations stood at $20.4 billion during the most recent quarter, while its total cash also stood at roughly $20 billion excluding its financing operations. The company’s financial position is reasonably healthy, and it appears to be in a good position to meet its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe Ford stock has the potential for some gains if fears of a potential recession are allayed. That said, concerns about automotive demand and lower pricing could weigh on the company’s returns in the near term.

[1] Returns as of 8/5/2024
[2] Cumulative total returns since the end of 2016

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