Adhering to Trump’s agenda could now allow investors to focus on other tailwinds for Ford stock in 2017.
In the context of this article, a Trump stock is one that can see great upside potential because of Trump’s presidency. On January 3rd, President-elect Donald Trump threatened to slap an import tax on General Motors Company (NYSE:GM) for importing compact cars (Chevrolet Cruze small cars) to the U.S. from Mexico:
“General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A. or pay big border tax!”
Trumps pro-manufacturing agenda has focused on convincing companies to manufacture their products within the United States. He has threatened to impose a hefty import tariff on foreign goods entering the United States to motivate companies to adhere to his agenda.
Although this Twitter war was between General Motors Company (NYSE:GM) and Trump, Ford Motor Company (NYSE:F) announced the canceling of its $1.6 billion investment in a plant in San Luis Potosi, Mexico, amidst the General Motors-Trump Twitter exchange.
What made the case interesting for Ford is the manner in which the company managed to avoid being in Trump’s Twitter war. This is interesting for two main reasons. The move shields Ford investors from unexpected stock price fluctuation due to a Ford versus Trump Twitter war. And, it allows Ford skeptics to see the myriad of tailwinds that the company has going into 2017 and beyond.
Also Read: Should You Buy Ford Motor Company Going Into 2017?
The Ford stock has not fully participated in the 3-months long bull run seen in the U.S. stock market. For example, in the last 3-months, both the S&P 500 and the Dow Jones surged 5.37% and 9.27% respectively, compared to the 2.99% uptick in Ford stock. Ford’s slow stock price appreciation is not taking into account tailwinds for the company in 2017.
Adhering To The Trump Agenda: Ford Is Avoiding Headwinds
Trump is just getting started. He campaigned to bring back jobs to the United States and he is not going to give up on that promise. Therefore, Ford’s decision to cancel its plans for a $1.6 billion plant in San Luis Potosi, Mexico, and instead invest $700 million in Flat Rock, Michigan has two advantages.
Advantage 1: Higher ROI in Flat Rock than in San Luis Potosi and dodging the tariff bullet down the line
In the next four years, if Trump decides to impose the hefty tariffs on foreign goods, Ford will have managed to dodge a bullet. Ford will not hike production of cars from Mexico to the U.S. and thus avoid having its margin compressed by higher tariffs. Also, increased U.S. car production will ensure that Ford is no longer dependent on Mexico productions for its U.S. market.
Furthermore, in the event that tariffs are raised, the Return on Investment (“ROI”) in the Flat Rock plant in Michigan will be greater than the ROI in the San Luis Potosi plant. Meaning that the $700 million is being well spent and the $1.6 billion investment could be better used elsewhere.
Advantage 2: Bolstering investor confidence
Stock price volatility reduces investor confidence in the stock. For example, even though General Motors made a quick and diplomatic response, the brand is now associated with Trump’s potentially hefty Mexico tariffs. This means that whenever this issue comes up, General Motors is likely to be mentioned. A headwind that is difficult for any company to easily shrug off.
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This is the same problem Yum! Brands faced in China. In 2013, the inquiry into the use of excess antibiotics and hormones in KFC products by Chinese food regulators greatly damaged the reputation of KFC. The inquiry started in February of 2013 and aided in slashing Q1 2013 and Q2 2013 Y/Y growth rates to -7.58% and -8.33% respectively. The case was later proved to be false, but whenever a chicken-related issue arose, Yum! Brands’ stock price suffered. KFC was officially the only chicken company associated with the use of antibiotics. The same threat is possible for General Motors Company (NYSE:GM). This is why Ford dodged a bullet by appearing to support the agenda of the new administration. (Also See: Don’t Get Lured By Dead Cat Bounce In Ford Motor Company (F) Stock).