Cars in a lot beside the General Motors plant in Oshawa.
“We are not going to get discouraged,” Fields told the Automotive News World Congress in Detroit on Jan. 13, a day Ford shares closed at US$12.20, down from above US$16 a year earlier. “We’re going to focus on continuing to drive the business forward. At some point we’re going to get recognized.”
Exactly nine months after Fields’ comments, he’s still waiting for that recognition.
Ford shares closed Thursday at US$11.91 in New York — the company trades at a paltry price-to-earnings ratio of 4.9, well below its five-year average of 9.5.
And it is not alone. The S&P 500 Automobile Manufacturers Index has fallen 11.5 per cent year-to-date, with General Motors Co.’s shares tumbling more than eight per cent in the same period. At 5.2, GM’s price-to-earnings ratio is slightly better than Ford’s but is still well below its five-year average of 9.1.
(Fiat Chrysler Automobiles has been hit even harder, with its stock down 56 per cent this year and a P/E ratio of 3.9, but it is a somewhat different story due to its much smaller market cap and its weaker balance sheet.)
These stock market woes come despite record vehicle sales in the U.S., low gasoline prices, huge consumer demand for high-margin trucks and SUVs and record second-quarter profit at GM.
Part of the blame for the industry’s performance can be laid squarely on Ford’s shoulders. The company warned in July that its 2016 guidance was at risk due to stalling U.S. auto sales, sending its stock plummeting 8.2 per cent in one day and dragging the S&P 500 Automobile Manufacturers Index down 6.2 per cent.
“The problem with auto stocks is that no matter how good they are in terms of operations, the quality of management, the capital allocation to shareholders, once the downturn hits or there’s fear of a downturn coming, the stocks get slammed,” Morningstar analyst David Whiston said in an interview.
After six straight years of growth, U.S. auto sales have declined for the past two months, raising industry fears that the cycle has plateaued and a downturn is just around the corner.
THE CANADIAN PRESS/Frank Gunn
A worker checks the paint on a Camaro at the GM factory in Oshawa, Ont.
Ironically, the automakers may need to go through another sales recession to prove to investors that they’ve transformed since 2009, when GM and Chrysler had to enter bankruptcy protection to survive the financial crisis.
“I think GM and Ford are going to surprise a lot of people then,” said Whiston, who gives both companies a four-star rating out of five. “They’ll maintain their dividend and then once they do that, perhaps coming out of the next recession the market realizes that they really are different and we need to start giving them a higher multiple than we do now.”
But the auto industry is facing more than just a potential cyclical slowdown. It’s also preparing to confront an array of technologies — self-driving, ride-hailing, car-sharing and so on — that could completely reshape its business model, forcing traditional automakers to adapt or fail.
“The 100-year-old auto industry business model is facing unprecedented technological disruption, starting with the very definition of the market itself — moving from ‘millions of units sold’ to ‘a trillion miles travelled’ annually,” Morgan Stanley analyst Adam Jonas wrote in a recent note.
“We believe the end game is fewer players and some very powerful all-new players, including those who don’t even make cars today.”
The problem with auto stocks is that no matter how good they are. … once the downturn hits or there’s fear of a downturn coming, the stocks get slammed
Jonas called GM, Ford and Fiat Chrysler “cheap for a reason,” arguing that they will “have to execute transformational changes to their strategy to make the transition.”
This isn’t news to the automakers, which are trying to varying degrees to prepare for the future. GM has invested US$500 million in Uber competitor Lyft Inc. and is in the midst of rolling out a car-sharing service called Maven. Ford has said it will release a fully self-driving car within five years and plans to double the staff at its Silicon Valley office by 2017. Fiat Chrysler is further behind its competitors, but recently announced plans to work with Google on testing self-driving technology in its Pacifica minivans.
Jonas believes investors should move away from the traditional automakers if they want to make money, arguing that parts makers Magna International Inc. and Delphi Automotive PLC, tech company Mobileye NV and electric-vehicle-maker Tesla Motors Inc. are best positioned for long-term growth.
In the long run, a shift to shared, self-driving vehicles could give automakers the ability to charge users by the mile and create additional revenue opportunities including data and vehicle connectivity, said Joseph Spak, auto analyst at RBC. The transition won’t be easy, but could eventually smooth out the cyclicality that has always plagued the industry.
“Vehicle miles travelled doesn’t vary as greatly (as auto sales) with the economic cycle,” Spak wrote in a recent note. “If automakers are able to capitalize on this trend, it could be the panacea they are looking for to re-rate higher from their historically very low multiples, which in part has to do with the boom-bust nature of the cyclicality of their earnings.”
In the meantime, Ford and GM continue to pay dividends at very attractive yields of five per cent and 4.8 per cent respectively, said Efraim Levy, automotive analyst at CFRA, who rates both stocks as five stars, or strong buys.
“I think the shares are attractive, and if you have to wait through a downturn (before the stocks begin to rise), collecting five per cent is not a bad way to do it in my book,” Levy said.