It seems Ford Motor Company (NYSE: F) has been besieged recently. Numerous Wall Street analysts have expressed impatience with the pace of its turnaround efforts. Some have even argued that Ford needs to reduce its $0.15 per share quarterly dividend.
On Wednesday, Moody’s added its voice to the chorus of frustration. The prominent credit-rating agency cut Ford’s senior unsecured rating by one notch to Baa3. It also maintained its negative outlook: a warning that another downgrade could be coming.
A downgrade to junk status could be painful for Ford. Nevertheless, in light of the stock’s recent plunge and the company’s multiple potential routes to recovery, I am inclined to buy more shares of Ford stock in the coming weeks, rather than viewing this downgrade as a signal to sell.
Back to the edge of junk territory
Ford worked hard under former CEO Alan Mulally to regain an investment-grade credit rating after being pushed to the brink of bankruptcy during the Great Recession. In addition to being a point of pride, investment-grade status makes it easier (and cheaper) for Ford to borrow money. Some institutional investors can only hold investment-grade rated debt.
However, this investment-grade status is now at risk. Baa3 is the lowest investment-grade rating in Moody’s scheme, so another downgrade would put Ford’s credit rating back in the “junk bond” or “high-yield” category.
Moody’s cited Ford’s deteriorating financial results across multiple regions of the world — even the automaker’s traditional stronghold of North America — to justify cutting its credit rating. While Moody’s acknowledged that Ford has plenty of strengths, it highlighted the complexity of turning around multiple business units at once and the risk of a recession. Both factors could complicate Ford’s plans to quickly rebuild its profitability.
Ford has a little bit of time — and it should be enough
Luckily for Ford, Moody’s isn’t threatening an immediate downgrade to junk status. The rating agency’s report stated, “The ratings could be downgraded absent clear progress in pursuing the Fitness initiatives by early to mid-2019, with evidence that the company is on a strong trajectory for recovery.” That gives the automaker a few quarters to get back on track.
Fortunately, some of its recent woes are temporary. For example, absent a trio of unusual items — led by the impact of a massive fire at a supplier factory — Ford’s operating margin in North America would have been 9.9% instead of 7.4% last quarter.
Additionally, while Ford may not be able to fully execute major strategic changes during the first half of 2019, it has plenty of time to present a firm plan. Indeed, Ford has already revealed some of the key details about how it will reduce spending by $25.5 billion over the next five years under its Fitness plan. Other parts of its turnaround could be as simple as finding buyers for the many parts of its business that are losing money today.
Lastly, Ford will already start to benefit from the gradual wind-down of its traditional sedan business in the U.S. by the first half of 2019. The company has plenty of room to improve its earnings just by not building cars at a loss. That said, the bigger boost will come later in 2019 and in 2020 as Ford will benefit from a wave of all-new crossover, SUV, and truck models.
Time to be greedy?
Ford stock has lost about 40% of its value over the past five years. It now trades for just seven times earnings. Some bears would argue that it is a classic value trap and is set to fall further, particularly when the next recession hits the U.S.
However, Ford is still making a remarkable amount of money, given that its operations outside of North America are collectively deeply unprofitable. It will take time to fix this situation, but there is clearly a solution — if all else fails, those parts of the business could be shut down.
Meanwhile, in North America, replacing Ford’s aging lineup of cars, SUVs, and crossovers with the auto industry’s freshest portfolio of crossovers and SUVs by 2020 will drive huge profit growth if economic conditions remain relatively benign. The portfolio refresh should also lessen the potential harm from a recession. With Ford stock having fallen below the $10 mark again last week, there seems to be a lot more upside than downside.
10 stocks we like better than Ford
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and Ford wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of August 6, 2018