How Low Can Ford Motor Go?

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April 25, 2006 | SIN Picks | | Author Asif

Recent Price Action: Ford Motor (F) shares closed yesterday at $6.96, the lowest in more three years. The last time the stock dipped this low was back in March 2003 when the stock closed below $7 for six trading sessions. Barring these six trading sessions, the stock has not closed this low in more than a decade, reflecting the extreme bearish sentiment and the pressures the company faces. It certainly feels like Wall Street has thrown in the towel and capitulated, which is usually a contrarian buy indicator.

Why I sold Ford from the SINLetter Model Portfolio: I sold Ford in April 2006 from the SINLetter model portfolio because of continued loss of market share in the United States and the possibility of General Motors (GM) declaring bankruptcy. I wanted to discuss my decision in greater detail and hence decided to write this blog entry. When I featured Ford in the January edition of SINLetter, I did not believe that a GM bankruptcy could cause Ford to declare bankruptcy as well. I still believe that the chance of bankruptcy is slim and both GM and Ford have reiterated in recent weeks that “bankruptcy was not an option”. However a small line in the 2005 annual report under the section “Risk Factors” stating “adverse effects from the bankruptcy or insolvency of a major competitor” left me unnerved and led me to sell Ford from the SINLetter model portfolio.

Latest Quarterly Results and Long-Term Outlook: According to the latest quarterly report released last Friday, Ford plans to reach profitability “no later than 2008″ and currently holds almost $38 billion in cash and short-term investments. When compared to the previous quarter, total assets decreased marginally from $269.476 billion to $269.076 billion while total liabilities increased marginally from $255.397 billion to $255.905 billion. The net loss for the quarter was 64 cents per share or $1.2 billion but earnings from continuing operations, excluding special items, was 24 cents per share, or $458 million. At this point, it certainly feels like all the negative news is already factored into the stock and the key risk is further loss of market share. I still continue to hold Ford in my personal portfolio and may also consider adding to this position if the market share stabilizes in the coming months.




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  1. Matt Goldseth
    May 6th, 2006

    By selling Ford in April, Im afraid you may have followed the unfortunate emotional mentality which hurts us investors so often. We tend to hold on during the slide, HOPING the pain will end…and then sell at the bottom when pain is unbearable.

    The horific market performance, business management, energy and labor crises, etc have been priced into the stock already. If one were to check out an analysts (or mine!) discounted cash flow models for future prospects, it would become apparent that Ford at this price is a value play again!

    Buffet got rich buying stocks of companies like this…hammered into the ground, but with business and market enough to recover.

    I weould suggest F owners HOLD their stock, collect that 6% dividend and sell call options for 2008 at $7.50 strike price.

    Invest this stock in a Roth to avoid taxes, and the options give you a nice hedge against further depreciation and between the option premium and dividend, you’ll lock in a nice 15-25% return on your investment by 2008. which would return your investment 100% in 4-5 years even if the stock went to zero….which it wont.

    Im looking to buy at $6.25-$6.5 and hold LONGTERM as a value part of my portfolio. Good luck and God bless.

  2. Asif
    May 6th, 2006

    Matt, my blog entry precisely reflects your sentiment as I stated “It certainly feels like Wall Street has thrown in the towel and capitulated, which is usually a contrarian buy indicator”. I sold Ford in April for a small gain of 3.11% as I felt that the stock could continue its slide until its market share stabilized and the stock did exactly that. The latest monthly sales figures for April 2006 indicated a 7% decline in sales. Market share stabilization is the catalyst I am looking for before I invest in Ford again for the long-term.

    The horific market performance, business management, energy and labor crises, etc have been priced into the stock already. If one were to check out an analysts (or mine!) discounted cash flow models for future prospects, it would become apparent that Ford at this price is a value play again!

    Buffet got rich buying stocks of companies like this…hammered into the ground, but with business and market enough to recover.

    I weould suggest F owners HOLD their stock, collect that 6% dividend and sell call options for 2008 at $7.50 strike price.

    Invest this stock in a Roth to avoid taxes, and the options give you a nice hedge against further depreciation and between the option premium and dividend, you’ll lock in a nice 15-25% return on your investment by 2008. which would return your investment 100% in 4-5 years even if the stock went to zero….which it wont.

    Im looking to buy at $6.25-$6.5 and hold LONGTERM as a value part of my portfolio. Good luck and God bless.

  3. matt
    May 11th, 2006

    I see. No doubt, its a value play in some sense, but carries more risk than most value investors are willing to speculate on! Im admittedly not familiar with your overriding strategy, so I may have missed your point.

    Ford will be fun to watch…I dont think Ford can regain market share any time soon if at all. US labor, taxes and regulations are simply too oppressive to compete with Japan as well as the upcoming manufacturing in Korea, and even India (gasp!).

    My opinion is also based on my experience working in the car industry…I get tons of feedback from buyers, dealers, wholesalers, auctions, etc
    Ford is much like a cancerin need of healing from the inside…so that they can sell their product without the $3000 rebate band-aids which fluff up their sales figures, but have left their margins on life-support.

    I believe Ford and GM will continue cannibalizing eachother in the foreseeable future while Kia, Honda and Toyota continue to grab US market share.

    As the government continues to artificially push hybrids, F has an opporunity to saink some money and talent into a bold new product line and claim a niche while repairing the light truck operations which were the bread and butter of profits. They WILL pay the dividend as a cut would basically force any remaining shareholders to flee forever! And the governm,ent would never let the auto industry die here!

  4. Matt
    May 11th, 2006

    I think any speculation on stock price and recommendations are absolutely worthless without a TIME FRAME…even hotshot Cramer gets away with this crap…
    IMO, Pretty good LT contrarian play. 1-5 years

    Any value investor with a mid-to long term mentality really should add covered calls to their portfolio to hedge against further depreciation and volatility while the churning continues and as various “”balanced”" or “”income”" fund managers start scaling out of their positions and “”value”" managers begin scaling into theirs.

    The rest of your portfolio looks great and your site layout looks fantastic…great job. I may drop in here more regularly to keep some discourse on interesting perspectives. Always good to have contrarian thought!

  5. Yan Provencher
    June 8th, 2006

    Good day,

    I just bought once again a bundle of stock shares of Ford via E-trade Canada at 6,73$ (now at a record low of 6,58$). I am just wondering when you are expecting the Ford ride to the bottom to stop? Is it planning on going bankrupt this year or what?

    I am loosing a lot of money on this and I am on the verge of going bankrupt myself, I should have gone to the casino, I would have made more money this way I am 100% sure.

    Best regards,

    Yan Provencher
    shareholder

  6. Asif
    December 13th, 2017

    Yan, the Fitch downgrade of Ford’s long-term unsecured debt certainly did not help the stock today. Moreover the market as a whole has been trending lower over the last few weeks.

    It is extremely difficult, if not impossible, to call a bottom or a top. I just feel that we may be close to a bottom here. Sure, it is possible to speculate in stocks just like you would gamble at a casino, but it is also possible to invest for the long-term through a well diversified portfolio of domestic and international stocks. I addressed this very issue in the FAQ section of my website and you can see it here.

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