Shares of Ford Motor Company (F +0.04%) are trading near their 52-week low. The domestic automaker recently wrapped up its 2024 fiscal year, with heavy losses in its electric vehicle business wiping out much of the profits from its combustion model sales. Additionally, heightened volatility due to ongoing trade conflicts with Mexico and Canada threatens tariffs on goods and materials imported into the United States.
Today, the stock offers investors a massive 6.3% dividend yield and trades at only a fraction of the valuation of the S&P 500 index. Sometimes, stocks become cheap when a company deals with increased uncertainty. Ford could be an example of that now. On the other hand, Ford's stock could be inexpensive for good reasons. Flawed companies can lure investors in with a cheap price, only to wind up performing poorly.
So, which is it? Is Ford a buy now?
Three reasons why Ford stock is down
Life in the automotive business isn't easy. It's ruthlessly competitive. Ford's factories cost a lot of money to operate, and there is an abundance of competition from both domestic and foreign brands. However, Ford is dealing with additional headaches that have dragged the stock down.
First, the company is losing a lot of money trying to balance its profitable legacy combustion engine business with a potential future in electric vehicles. In 2024, Ford lost approximately $5 billion on consumer electric vehicles (Model e), offset by about $14.2 billion in profits from consumer internal combustion models (Ford Blue) and sales to professional, government, and commercial clients (Ford Pro).
NYSE: F
Key Data Points
Second, the U.S. government's ongoing trade conflicts with Canada and Mexico could result in tariffs on imported goods and materials, like steel used to build vehicles. Ford's management noted on the company's fourth-quarter earnings call that prolonged tariffs would significantly harm business. Tariffs could eat into profits and depress new vehicle demand by increasing prices.
Third, the economic backdrop has become somewhat concerning. The typical interest rate on a new vehicle loan is almost 7.5%, which is near a decade-high. Total credit card debt in the United States is at all-time highs, while the personal savings rate is near its lowest since 2016. Vehicles are big-ticket items, so people are less likely to buy them when their money is tight.
Trying to balance a gas-powered past with an electric future
Due to the tariffs and economic warning signs, Ford is undoubtedly a riskier stock today. Yet, the business is financially stable. At year-end, Ford reported having $28 billion in cash and $47 billion in liquidity, so while it is a challenged business, Ford isn't circling the drain by any means. Management is also scaling back its electric ambitions to focus on hybrid vehicles to strike a more profitable balance.
Admittedly, it's unclear whether it will work. Different companies have taken different approaches. For example, Toyota Motor has also embraced hybrid vehicles, while General Motors continues to progress in fully electric models. Electric cars aren't yet turning the industry upside-down, but that could change if innovation drives down electric vehicle prices and increases battery ranges over the next decade.
Should investors buy Ford now?
Ford is a cyclical business because it is sensitive to the economy and consumer spending. Long-term investors can sometimes do well buying a cyclical business when times are tough, earnings are lower, and sentiment toward the stock is at its lowest. Unfortunately, Ford stock has badly lagged the S&P 500 through multiple economic cycles.
F Total Return Price data by YCharts
It goes a long way toward explaining why the stock trades at a much lower valuation than the broader market. In other words, a low valuation doesn't make a stock cheap.
Ford's underperformance is arguably a symptom of the harshness of the automotive industry. There are expensive factories, tons of competition, and no real competitive moat. Even if the tariffs never arrive, Ford's electric vehicle losses will still drag on the company in the near term.
The dividend is nice but only goes so far (assuming it's not cut in a recession). Owning Ford stock, especially now, involves far more risk than looking for a better pitch elsewhere. Therefore, Ford Motor Company does not look like a buy today.
