In May, Ford Motor Company (NYSE:F) reported its strongest sales since 2006, and U.S. auto sales in general have been trending upwards over the last few months. Will Ford get a boost from the industry this month as well? On Tuesday's installment of "Stock of the Day", Motley Fool analyst Michael Finarelli says investors shouldn't put too much weight in one month's figures. Long-term investors should keep their eyes not only on Ford's sales, but -- more importantly -- on how the company converts those sales to underlying profits and cash flow.
Mike notes that Ford's gross and operating margins have been on the decline for the past several years -- in fact, for the 12 months ending March 31, out of every dollar of sales, the company was only able to hold onto roughly $0.03 of operating income thanks to the ongoing expenses inherent in Ford's industry.
So is Mike bullish on Ford? Unfortunately, he's not a fan of the economics of the automobile industry -- profits are traditionally thin due to the huge expenses involved, and cash flow available for shareholders suffers due to the large and persistent capital investments needed. Furthermore, on a price to earnings basis, shares of Ford are trading around the higher end of where they've been over the past 10 years.
In the video below, Mike tells how those industry economics are working against Ford.