In the latest quarter, Ford (F +3.46%) disappointed Wall Street with revenue and earnings that missed expectations. But the shares recently have benefited from improving market sentiment.
Even though this automotive stock has climbed 17% in the last month (as of Dec. 19), it's only up 3% this year. That's a disappointing showing when compared to the impressive 24% gain of the S&P 500.
As we near the end of the year, investors might be looking for ways to clean up their portfolios by getting rid of some companies. Should you sell Ford shares before the end of 2023?
Here's why I believe this is the right move to make.
Resolving labor issues -- for now
Ford was dealing with labor disputes for about six weeks earlier this year when its unionized workforce halted production at its factories. The uncertainty around this disruptive event created lots of worry for investors. But to everyone's relief, a deal was eventually struck.
However, the new worker contract will cost Ford an estimated additional $8.8 billion over the next five years. And just this year, the stoppage cost the business $1.3 billion in lost vehicle production and forced management to initially pull 2023 financial guidance. When they reintroduced their outlook, it showed a lower forecast for adjusted operating income and adjusted free cash flow.
While the business might have put this disturbance past it, it may occur once again when this new contract expires at the end of 2028. At that point, there's a chance that Ford will experience temporary factory shutdowns before agreeing to pay even higher wages to its workforce. That's the risk that shareholders always have to think about with Ford.
NYSE: F
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Ford's unattractive qualities
Besides occasional labor disputes that can substantially alter the company's financial situation, investors can't ignore some other reasons that make this business less compelling to add to a portfolio. For starters, I'm not a fan of Ford's cyclicality.
This company is fully exposed to the economic cycle, and factors like interest rates, gas prices, and unemployment play a major role in its success. In a higher-interest-rate environment, like the one the U.S. has been in, vehicles are less affordable for consumers.
It's challenging owning a company that sells products that customers can delay purchasing when economic times get tough. Consumers could very well pour money into maintaining their existing vehicles, as opposed to buying a new one, in a recessionary scenario. And this would pressure demand for Ford.
Cyclical businesses are also usually capital-intensive, and that's the case with Ford. Spending on research and development of new cars, building out manufacturing capacities, and paying a unionized workforce are all expensive activities. And let's not forget the company's heavy advertising budget, which is needed due to the intense competition in the industry.
Even Warren Buffett has previously said that a company requiring lots of capital investment is "a poor business to be in generally." This is more so the case in an inflationary period.
I fully understand why some investors would be inclined to hold onto their shares, though. Ford's current dividend yield of 5% is attractive for those who prioritize income. And the price-to-earnings ratio of 7.9 indicates a cheap valuation.
But in my opinion, the reasons to stay away from this stock are far more compelling than any bullish case. So it might be a smart idea to sell before the end of 2023.
