- Ford stock has entered a free fall, touching – year lows.
- The company reported losses in Q4 earnings and was only able to pay dividends because of its financial arm .
- Steeply rising auto loan delinquencies and a weak industry outlook will push Ford Motor Company into bankruptcy.
Ford Motor Company (NYSE: F) stock has tanked since I last wrote about the company unavoidable bankruptcy . After reporting depressing fourth-quarter earnings , the stock is trading near 33 – year lows.
The value of the overall auto loan and lease balances has surged to $ 1.. trillion. Worse, subprime loans reached $ billion in the final quarter of .
Ford Motor Credit Company does not lend to high- risk subprime borrowers. So, it doesn’t have a high delinquency rate. But Ford Motor’s increasing dependence on its financial arm is a cause for concern.
Since not all Ford debtors are prime borrowers, the imminent pop of the sub-prime bubble will hurt the company. The auto loan lending business has thin margins. Even a slight increase in delinquencies can have a severe impact on profits.
Many investors buy Ford for its high dividend yield. But the high yield has been unable to prevent the stock’s free fall. This may be because investors know Ford’s dividend is unsustainable, and a dividend cut is right around the corner.
And a subprime loan crisis, combined with an auto industry recession, can trigger a steep dividend cut.
US car sales have witnessed no growth over the last few years. For 236499, sales topped million units, but still edged lower
compared to The US car market has flat-lined. | Source: Wolf Street What’s worth noting is that car sales have remained flat despite the rise in auto-loans. Only student loans have outpaced car loans in the US | Source: Knoema) It seems like the only thing supporting car sales – and automaker profit margins – is the rise in subprime loans. The situation is reminiscent of the subprime mortgage crisis of Clearly, the US auto market is in terrible shape. Lenient lending practices have kicked the can further down the road, but that won’t last forever.
In addition, the situation in China, which is another key market for auto manufacturers, is dire. To contain the spread of coronavirus, hundreds of millions of people in China have been living under some form of quarantine.
This has taken a toll on the Chinese car market. Sales plunged % for the first two weeks of February. The situation forced the hand of carmakers, who are set to (cut production by) %.
The outlook for the automobile industry looks gloomy. And with subprime loans already at record levels, the next downcycle in the automobile industry will be worse than the last one.
Given that Ford barely survived the last recession, the chances of it surviving the next one are close to zero.
(This article was edited by Josiah Wilmoth .