Ford (F 0.90%) shares only ended up rising by 5% in 2023, which seriously lagged the 24% gain of the S&P 500 index. However, in the last two months of the year, the stock surged more than 20%. Perhaps there's hope that the strong momentum will continue into the new year.
Investors have certainly surrounded the business with fresh optimism recently. But does that mean this top automotive stock is a smart buy right now? Let's take a closer look under the hood of Ford.
Facing some challenges
Observers are likely familiar with the issues that have been plaguing Ford. The labor strike forced management to pull guidance briefly, only to reinstate it again. The impact of the work stoppages in 2023 is estimated to be $1.7 billion of earnings. Over the life of the new contract, slated to end in the spring of 2028, costs related to the deal are expected to increase expenses by $8.8 billion.
This happened during what has been a difficult time for auto manufacturers. Ford missed Wall Street estimates for revenue and earnings in the third quarter last year. In addition to the labor disputes, macro headwinds were to blame. Higher interest rates create an unfavorable environment that discourages consumers from wanting to shell out tens of thousands of dollars on new vehicles.
But Ford was hoping that its EV (electric vehicle) ambitions would pick up the slack. Although this segment, known as Model e, saw revenue climb by 26% last quarter, the leadership was disappointed enough with weaker-than-anticipated demand that it decided to delay about $12 billion in EV-related investments. This could lead to Ford falling behind rivals in EV development.
NYSE: F
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Focus on the bigger picture
It's easy to get caught up in Ford's latest struggles, which can blur an investor's vision of the long term. Instead, we should focus on the bigger picture. Yet in this light, too, it becomes clear that this is a stock that's best left out of one's portfolio.
The key reason why Ford isn't a solid long-term investment opportunity is that it doesn't have an economic moat. It might be a household name, but there are numerous other popular auto brands out there, from domestic rivals to international giants. This limits the power of the Ford brand name to help the company's financial performance.
I'd also argue that the business lacks any scale advantages that can help bolster profitability, which hasn't shown any signs of improvement over the years. The result is that Ford consistently generates a low operating margin. This is the disappointing nature of being a mass-market automaker.
Moreover, Ford's operations require constant heavy capital investments to boost manufacturing capabilities, pay for a massive workforce, advertise to consumers, and fund research and development efforts. This is all very expensive, and it's all necessary to at least maintain the company's competitive position.
Warren Buffett agrees that this is a terrible trait. Needing to fund heavy capital expenditures makes Ford a poor investment, particularly in inflationary times.
Investors who are considering buying the stock should look at Ford's track record of shareholder returns. In the last 10 years, which is a long enough time frame to come to any meaningful conclusion, the stock produced a total return of 19%, a figure that includes dividends. The S&P 500 index, on the other hand, would've more than tripled your money (213% total return).
Ford's cheap valuation, a current price-to-earnings ratio of 7.6, might be enticing for some investors, but I'm still not buying the stock. There's little reason to believe it can generate market-beating returns over the long term.
