Shareholders of Ford (F 0.72%) have had a disappointing run, with the business posting a total return of just 24% in the past decade. For comparison's sake, an investment in the S&P 500 would have more than tripled your capital over that time frame.
Should investors buy this well-known auto stock right now despite its poor track record? Let's look at the good, bad, and ugly with Ford before coming to a conclusion.
The good
In recent times, Ford has been reporting solid financial results. Revenue soared 16% in 2022 and 18.1% in 2023, well above the rates in the previous years. After supply chain issues that rattled the industry during the pandemic started easing, the company was able to benefit from higher volume and higher prices.
During the earnings announcement for the first quarter (ended March 31), management maintained its guidance for adjusted earnings before interest and taxes this year to total $11 billion at the midpoint. And due to lower capital expenditures, it now believes adjusted free cash flow will be higher than previously forecast.
Besides Ford being on what appears to be healthy footing, income-seeking investors will certainly appreciate the company's hefty dividend yield of 4.7%. That's a nice boost for potential returns.
NYSE: F
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The bad
Tesla's monumental rise over the past decade to become a $772 billion company has rattled the auto sector. Elon Musk's business is the world's leading seller of electric vehicles (EVs). This success kicked off a big strategic shift among legacy carmakers to develop their own EVs.
Ford is one of the players in this game with popular models like the F-150 Lightning pickup and Mustang Mach-E SUV. In 2023, the company generated $5.9 billion in revenue from what it calls its model e segment, where its EV operations are housed. That figure was up 12% year over year.
But the problem is that this division is far from profitable. It reported an operating loss of $1.3 billion in the first quarter, after losing $4.7 billion in all of 2023. It's anyone's guess when it will produce earnings.
To make matters worse, management has decided to delay $12 billion in EV-related investments because demand isn't as strong as hoped. Ford needs to figure out a clear path to profitable growth with its EVs, otherwise this segment will continue to be a huge drag on its financials.
The ugly
I don't believe Ford is a worthy investment for many reasons. For starters, the industry is extremely cyclical. The company is sure to be hit hard in a recession, when consumer confidence is low and unemployment is high, and people hold off on buying new vehicles. It's impossible to predict when the economic cycle will turn in order to buy and sell Ford shares at the right time.
The business operates in a mature industry. According to the International Energy Agency, the number of passenger vehicles sold globally in 2022, 74.8 million, was just 12% higher than in 2010.
Even if EVs really do take off, I don't see Ford's sales volume changing when compared to the past. Add in the fact that competition is fierce, and the automaker doesn't have any sort of economic moat.
There is also cause for concern from a financial perspective. In the past decade, its operating margin has averaged a disappointing 1.9%. And the company's operations are extremely capital intensive; it must always spend big on research and development, manufacturing, labor, and marketing to maintain its industry position, let alone strengthen it. The negatives are too difficult to ignore, so I'm not buying Ford stock.
