Ford (F -0.82%) had a strong 2023. Its revenue was up 18.1%, as it sold 182,000 more units than the year before. The results were driven by favorable pricing trends. That helps explain why shares are up 9% this year (as of April 5).
Investors who want exposure to the industry are probably looking at this auto stock as a potential buying opportunity. Let's consider the investment merits of this business right now.
Recent trends
The momentum for Ford has carried over into this year. The company reported unit sales growth of 7% during the first three months of 2024. Hybrid sales surged 42%.
A bright spot was Ford's electric vehicle (EV) division, known as Model e. Impressive growth for two key models, the Mustang Mach-E and the F-150 Lightning, helped drive overall EV sales volume up 86% in the first quarter. Selling just over 20,000 EV units last quarter puts Ford behind only Tesla in the U.S. market.
With such monster growth in the EV segment, it makes you scratch your head at why the leadership team chose to delay $12 billion in investments in this area. Investors should be asking what type of growth executives were really expecting to warrant making these cash outlays as planned. Perhaps the EV division will never grow at the desired pace.
Nonetheless, Ford is in a favorable position today. With $2 billion in cost reductions identified for this year, the business expects to generate $10 billion to $12 billion of adjusted operating income in 2024. At the midpoint, that would be higher than the $10.4 billion registered last year.
Why I'm not a buyer
Ford might be benefiting from solid sales trends right now, but investors need to consider the long-term perspective before buying any business. This places the emphasis on factors that can drive shareholder returns over many years. Viewed in this light, Ford doesn't make for a worthy investment candidate, in my opinion.
The first aspect to think about is Ford's moat, or a set of traits that allow it to outperform its rivals. To be clear, I don't believe the business possesses any sustainable competitive advantages. Supporters might point to the company's brand or its scaled manufacturing capabilities. But all of its industry peers -- including General Motors, Stellantis, Honda, Toyota, and Tesla, to name a few -- have name recognition and sizable production capacity.
This points to how intensely competitive the automotive space is. People have a large number of choices in front of them. Ford has to constantly spend massive amounts of capital on marketing efforts, research and development, and labor and production, all to engage in ongoing price wars with rivals who are focusing on all the same areas.
The result is that meaningful growth and margin expansion will be extremely difficult to come by, which has been true in the past. Ford's 2023 revenue was only 20% higher compared to a decade ago. And during that 10-year stretch, the operating margin has shown zero ability to improve. Why would the future be any different? That's particularly true when talking about an extremely mature industry like this one.
Ford will also always have to deal with macroeconomic trends, mainly changes in interest rates and the possibility of recessions. Owning businesses that are extremely sensitive to factors that are outside of their control for their success is not typically a smart strategy. What direction the economy is headed in is impossible to predict.
If we include dividends, in the past 10 years, Ford shares have returned 35%. That gain seriously lags the total returns of the S&P 500 or the Nasdaq Composite Index. Investors who are attempting to beat the market over the long term should avoid buying Ford stock. This poor track record speaks for itself.
