Technology companies seem to get all the attention these days. But it's best not to forget well-known businesses in other industries that are also important to the economy. Detroit automaker Ford Motor Company (F 1.74%) is one of them.
Having been around since 1903, this company has become a leader in its industry. But is Ford stock a buy now? Investors will be able to make a better decision after assessing both the bull and bear cases.
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Driving greater recurring revenue
One of the biggest critiques of investing in car companies is that they don't lend themselves to repeat purchase behavior from consumers. That's the case with an expensive item. This is in stark contrast to businesses that sell products and services that are low-cost and bought at frequent intervals. Consequently, Ford could experience lumpy demand.
Management is aiming to change things. Its Ford Pro segment, which sells vehicles, software, and services to commercial and government clients, is a bright spot. It posted revenue growth of 15% in 2024, with a 13.5% operating margin that's much higher than the company overall.
Ford Pro had 675,000 subscriptions as of March 31, a figure that soared 20% year over year. "Ford Pro Intelligence continues to drive recurring high margin, non-cyclical revenue," CFO Sherry House said on the fourth-quarter 2024 earnings call. Ford Pro Intelligence is a cloud platform that allows customers to manage their vehicles.
The dividend is an obvious reason why investors would want to buy Ford shares. The current dividend yield is 5.73%, which is a sizable payout that certain investors will find very compelling.
Of course, this also implies that the stock is cheap. As of June 25, shares trade at a price-to-earnings ratio of 8.4. If Ford's valuation multiple somehow gets back to its trailing-five-year average of 10.1, there is already 20% upside to the stock.
Ford is cheap for a reason
I believe that a good starting point to find winning stocks is to look at companies whose shares have performed well in the past. Unfortunately, Ford doesn't fit the bill. Since June 2015, Ford stock has generated a total return of 19%. This gain, which includes the dividend, seriously lags the S&P 500 index and its 245% total return. I'm not very confident that this trend will change.
Ford isn't going to register meaningful growth. The automotive industry is very mature, with unit sales not really budging by much. That doesn't create a favorable backdrop for Ford to expand its business. Wall Street analysts see revenue rising by just 2% between 2024 and 2027.
The company's dividend is currently high, but it might not be sustainable. That's because Ford operates with extremely thin margins. On $40.7 billion in revenue in Q1, it reported just $1 billion in adjusted operating income. This provides almost no wiggle room.
That's a scary proposition. Ford's business is cyclical. Consumers will delay buying new cars if they are worried about the economy. This can have a major impact on demand and sales. With falling revenue, management could pause the dividend altogether to conserve cash.
Besides the economy, Ford must also navigate factors completely outside of its control. This has revealed itself this year, with the dynamic tariff situation forcing the leadership team to implement pricing discounts to drive demand. Running a complex supply chain makes things difficult.
There are also labor disputes that can push costs higher over time. Unless Ford wants to risk a significant disruption to its operations, it must eventually play ball with its unionized work force.
Ford might be an icon of the American economy. But this stock is not a smart investment for long-term investors looking to own high-quality businesses that can outperform the market.
