Avoid These 2 Automakers at All Costs

Automakers have been struggling over the last few months. Traditional automakers like Ford (F) have been in a slow downtrend over the last few years as it has consistently moved lower despite strong fundamentals.

In the meantime, new players like Tesla (TSLA) have enjoyed great growth due to its apparent potential. However, going forward, I don’t expect both of these stocks to perform any better due to reasons mentioned below.

Ford

In August 2016, Ford reported dreadful sales figures.
The company’s brand sales were down 9 percent year over year, with entire Ford company sales down 8 percent year over year. Moreover, the sales of the most lucrative product, the F-series, declined 6.1 percent year over year, but are still overall in the green region.

In the month of August, the company publicized that it was recalling 830,000 vehicles in North America which also comprised some popular models such as Focus, Escape, as well as Mustang. The automaker recalled vehicles because its doors might not latch appropriately and could conceivably open while being driven.

Later on, the number of recalled vehicles reached 2,389,292.
Avoid These 2 Automakers at All Costs
Image by iMaxN / Pixabay
The automaker also recognized one accident and three injuries that could be related to faulty latch. As a matter of fact, the overall amount required for recall is now estimated to be approximately $640 million, and is the reason why the company lowered its guidance for the full year.

Moving onward, it is highly likely that the Ford’s earnings will decline y-o-y mainly due to the increased competition from other OEMs. Moreover, this will extend a drop in revenue and profitability, even if the SAAR remains strong. It is likely that the automaker will continue to face problems in the foreseeable future.

Tesla

Tesla is one of the most significant players in the EV and self-driving cars market. Despite being a leading electric vehicle automaker with an endured requirement to innovate on that front, Tesla is also capitalizing on battery R&D, focused at making the electric vehicle reasonable for mass adoption.

As a matter of fact, the automaker’s R&D has more than tripled in the last two and a half years to $717.9 million from just $232 million. The company’s futuristic initiatives need huge funding and as a result, Tesla has often found itself short of funds to deliver on its targets.

All problems aside, I think Tesla is shooting itself in the foot by planning to buy SolarCity (SCTY). A merger with SolarCity might be interesting for Tesla. However, it is not likely that the automaker is in a position to buy SolarCity at this moment, specifically as General Motors is on its way to bringing the challenging bolt to market.

Tesla’s primary objective is to make electric vehicles a mainstream automotive choice, but it is very difficult goal to achieve, as EVs and hybrids embrace less than 1 percent of the overall numbers of cars sold around the globe.

The main reason behind this is that EVs are not affordable for mass market adoption, as the cost of EVs is considerably greater than that of most traditional cars.

In opposition, General Motors (GM) is about to release Bolt which will signify an industry shift in the direction of EVs, and this will certainly help the company to grasp a robust position in the EV market. Going forward, Tesla may struggle to continue beating its competition—a feat it has successfully managed to achieve till now—due to lack of funds as adding SolarCity to its ranks will deteriorate its cash flow and balance sheet. Thus, for this reason, I think Tesla is a sell at current levels.
Published on Sep 23, 2016
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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