Shares of Ford Motor Company (F +1.15%) have been on an upswing recently, as they've climbed about 20% in the past six months. Investors are optimistic after the business reported 2023 fourth-quarter financial results that were well received by the market. The company's positive sales momentum continued through the first three months of this year.
So should investors buy this automotive stock right now?
Looking under the hood
Ford is a large business that generated $176 billion of sales in 2023. While most investors are likely familiar with how the company operates at a high level, I think a better understanding can be gained by looking at Ford's three segments, which are all experiencing differing levels of success (or failure) right now.
We'll start with Ford Blue, the company's key division that sells gas-powered and hybrid vehicles and raked in $21.8 billion of total sales in Q1, down 13% year over year. Management blamed the production ramp-up of the new F-150 pickup truck.
The EV (electric vehicle) segment, known as Model e, has been a focal point for the leadership team. Seeing Tesla's monster success over the past decade has spurred heavy investment by carmakers to develop their own EVs in hopes of capturing the secular sustainability trend.
But Ford is struggling in this department. Revenue tanked 84% in the first quarter. And the segment continues hemorrhaging money, reporting a $1.3 billion operating loss. There's no telling when this will change, as demand for EVs isn't as strong as industry executives had hoped.
Then there's Ford Pro, the division that's thriving the most. This houses the company's commercial-focused operations. Sales jumped 36%, and the operating margin was an impressive 16.7%.
NYSE: F
Key Data Points
What is your objective?
Investors who are contemplating what to do with Ford shares need to first take a step back and figure out what exactly their goals are. If you're a dividend investor who appreciates owning companies that can generate passive income, then perhaps Ford is worthy of consideration. The current dividend yield is 4.9%.
However, if you're someone whose primary objective is to try and outperform the S&P 500 over the long term, then I don't think the stock deserves a spot in your portfolio.
Let's look at history for some clues. In the past 10 years, Ford shares have generated a total return of 29%, a figure that includes its hefty dividend. The S&P 500, for comparison, has produced a total return of 240%, crushing Ford. This outperformance is still the case in the past three and five years.
This makes me wonder what is going to change this track record going forward. According to Wall Street consensus analyst estimates, Ford is slated to increase revenue and decrease earnings per share at compound annual rates of 3.2% and –0.2%, respectively, between 2023 and 2026. That doesn't give investors much reason to get excited.
Valuation plays a critical factor in potential returns, of course. As of this writing, Ford shares trade at a price-to-sales ratio of 0.28, which is 15% below their trailing-10-year historical average. This implies there is some upside should the valuation eventually revert to the mean. But that's still not enough of a reason to believe the stock can produce a satisfactory result.
There are some unfavorable factors to consider that make me believe Ford is not a high-quality business. Besides muted growth prospects, margins are low, and it hasn't expanded over the years.
Plus, the industry is extremely difficult when it comes to finding outsized success. Competition is incredibly intense. And changes in macro conditions can have a profound negative impact on the financials.
Therefore, Ford is a stock that's best kept out of my portfolio.
