To say that Ford Motor Company (F +4.11%) has been an underwhelming investment would be accurate. In the last five years, shares are up just 37%, trailing the S&P 500 by a mile. And in the last decade, they're down 11%. That's certainly disappointing for investors.
But maybe things will be different going forward. Ford posted impressive financial results for its first quarter, handily beating Wall Street estimates. That's a clear showcase of solid momentum. And shareholders are optimistic about the company's electric vehicle (EV) ambitions.
Is Ford stock a buy right now? Let's examine the bull and bear arguments for this top automotive business before answering that question.
The bulls are stepping on the gas pedal
In March 2022, Ford announced a major restructuring of its operations. This move, meant to better align resources with various objectives, reorganized the company into three divisions, which include Ford Blue (legacy), Ford Pro (commercial), and Ford Model E (EV). Ford expects up to $2 billion in restructuring charges this year, and it believes this change can boost the company's operating margin over the long term. Investors can certainly appreciate how Ford is trying to better position itself as we look toward the next decade.
Speaking of changes, the business is investing heavily in its EV operations. Ford already has popular models like the F-150 Lightning and the Mustang Mach-E, and it commands the third-place position in the domestic market for new EV sales. But management wants to produce 2 million units annually by 2026, and by 2030, they want half of global sales to come from EVs.
This process isn't going to be cheap, as Ford puts a lot of resources behind ramping up manufacturing capabilities. The EV segment posted a $700 million operating loss last quarter, placing a drag on the company's overall financials. The leadership team expects an 8% operating margin by 2026 as Ford starts selling more vehicles, hopefully benefiting from economies of scale for EVs like its legacy segment does.
I noted how Ford's share price has disappointed investors. But there is a bright side to the equation. The business generates a lot of free cash flow, to the tune of $9.1 billion in 2022. And this allows it to pay sizable dividends. Ford's current yield is a solid 4%.
NYSE: F
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The bears are pumping the brakes
Ford's most popular bear argument likely deals with just how cyclical the auto industry is, heavily reliant on favorable economic conditions that are completely outside the company's control. Low interest rates, low unemployment, and a growing economy can lead to high car sales, but the opposite can be devastating. Declining sales, coupled with huge fixed costs, create a troubling scenario. Ford's profit margin in the past 10 years averaged 3.5%, meaning even minimal sales fluctuations can be concerning.
Moreover, the nature of Ford's operations means there will always be a need for massive amounts of capital expenditures. Investing in things like machinery and factories to produce vehicles, as well as supporting its large workforce and conducting research and development on EVs, will be very expensive. Investors have to be OK with this capital-intensive reality before buying the stock.
Then there's the ridiculous competition among auto manufacturers. Consumers have so many options to choose from, whether from domestic businesses or foreign automakers, when looking at buying a new car. The result is that car companies have almost no choice but to compete aggressively on price, often handing out various incentives to spur demand. This puts a limit on the potential of Ford's already low margins.
Heightened competition also makes it incredibly difficult to achieve meaningful growth. Not only does Ford already require huge amounts of capital to operate and expand, but there are also numerous other well-funded rivals trying to do the same thing in a mature industry. That's a tough environment to be in.
The bear arguments hold more weight, in my opinion, and for that reason I don't think the stock makes for a good investment. However, that hefty dividend yield could be attractive for investors who care more about earning a steady income stream from their holdings.
