In May, Ford Motor Company (NYSE:F) reported its strongest sales since 2006, and U.S. auto sales in general have been trending upwards over the last few months. Will Ford get a boost from the industry this month as well? On Tuesday's installment of "Stock of the Day", Motley Fool analyst Michael Finarelli says investors shouldn't put too much weight in one month's figures. Long-term investors should keep their eyes not only on Ford's sales, but -- more importantly -- on how the company converts those sales to underlying profits and cash flow.
Mike notes that Ford's gross and operating margins have been on the decline for the past several years -- in fact, for the 12 months ending March 31, out of every dollar of sales, the company was only able to hold onto roughly $0.03 of operating income thanks to the ongoing expenses inherent in Ford's industry.
So is Mike bullish on Ford? Unfortunately, he's not a fan of the economics of the automobile industry -- profits are traditionally thin due to the huge expenses involved, and cash flow available for shareholders suffers due to the large and persistent capital investments needed. Furthermore, on a price to earnings basis, shares of Ford are trading around the higher end of where they've been over the past 10 years.
In the video below, Mike tells how those industry economics are working against Ford.
Warren Buffett's worst auto nightmare (Hint: It's not Tesla)
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to invest in this megatrend. Click here to access our exclusive report on this stock.
Mark Reeth has no position in any stocks mentioned. Michael Finarelli has no position in any stocks mentioned. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.