Although Ford (F -0.81%) shares are up 17% in 2023 (as of Aug. 3), they have cratered 14% in the past month. Given that the business just posted stellar Q2 results, the stock's recent performance doesn't make sense. For some opportunistic investors, this might present a chance to add the company to their portfolios.
It's best to try and gain a better understanding of the bearish and bullish arguments for Ford, so that investors can make a more educated decision when it comes to the automotive stock.
Reasons to be optimistic
Ford reported second-quarter revenue of $42.4 billion (excluding the financing division) and adjusted diluted earnings per share of $0.72, both handily beating Wall Street estimates. That revenue figure was up 12% year over year, driven by gains across the board, including at Ford Blue (internal combustion cars), Ford Pro (commercial segment), and Ford Model e (electric vehicle division).
John Lawler, Ford's CFO, pointed to "higher net pricing and volume" as key contributors to the quarterly results. This is encouraging for shareholders to see because it demonstrates the company's ability to benefit from both parts of the sales equation -- namely, raising prices and increasing quantity.
Management raised full-year guidance, now forecasting adjusted earnings before interest and taxes (EBIT) of $11.5 billion (at the midpoint), up from a prior outlook of between $9 billion and $11 billion. The economic environment is still a concern, but improving supply chains and greater unit volumes across the industry should be a benefit.
Investors are also bullish about the transition to electric vehicles (EVs). Ford Model e saw revenue surge 39% in the latest quarter to $1.8 billion. CEO Jim Farley said that Ford expects to be able to produce 600,000 EV cars at an annualized run rate by 2024, with 2 million as the ultimate goal. For comparison's sake, Ford sold just 47,000 EV units in the first six months of this year.
The company hopes that the EV transition will be a financial boon, mainly because EVs are generally more expensive than gas-powered cars. And Ford can try and attract new customers to the brand.
"More than 60% of Mach-E and half of Lightning customers are new to Ford," Farley noted on the Q2 2023 earnings call when discussing the company's most popular EV models.
Reasons to avoid the stock
The EV segment's growth is impressive, but who knows when it can become profitable? Last quarter, Ford Model e posted a $1.1 billion operating loss. And now, the leadership team sees this division losing $4.5 billion in 2023 alone, up from a projected $3 billion loss. Nearly every other major auto manufacturer is coming out with their own EVs, meaning it can be challenging to ramp up sales to cover the massive investments needed to fund this endeavor.
Ford also faces stiff competition with its gas-powered vehicles, as has always been the case. In the company's home market of the U.S., besides domestic rivals, foreign automakers have also found tremendous success. There's also the potential for Chinese companies to have a bigger presence in the U.S. as well. The result is that Ford lacks any competitive advantages due to just how crowded the industry is.
Ford must always compete aggressively on pricing, an unfavorable situation that doesn't lend itself to outsize profitability. This is evident in the company's trailing 10-year average operating margin of just 7.5%.
Speaking more on the financial picture, the business requires an immense amount of capital investment to not only maintain its current standing, but to try and position itself for future growth. That's because research and development is costly, as is designing and building new manufacturing facilities. Ford's return on invested capital in Q2 was just 2.3%.
I think the bearish arguments hold more weight than the bullish factors. And so even though Ford shares trade at a cheap forward price-to-earnings ratio of 6.1 and offer a hefty dividend yield of 4.6%, I'm staying away from the stock. However, I can see why this might be a compelling buying opportunity for value-focused, income-seeking investors.
