If you’re looking for stocks that can do well over the long term, it’s a smart idea to identify past winners. Absent major industry or company-specific changes, it is reasonable to expect these companies to continue to reward their shareholders in the future.
For investors focused on the automotive industry, Ford (NYSE:F) may be on your radar, especially since it trades on a price-earnings ratio of only 12.3. Unfortunately, the shares have disappointed, with a total return of just 20% over the past decade. The S&P500 would have more than tripled your money in the same time.
This poor performance does not give me any confidence that Ford can achieve market-based returns in the coming years. That’s why it’s a company I won’t touch with a 10-foot pole.
Easy to be bearish
By taking a closer look at Ford under the hood, investors will have no trouble finding things to dislike. One of these factors is related to the moderate growth prospects.
Over the past decade, from 2013 to 2023, Ford’s sales grew at a compound annual rate of just 1.8%. Global gross domestic product (GDP), which measures the growth of the economy as a whole, has grown faster every year. The fact that Ford can’t keep up is a worrying sign.
This unfavorable situation also points to the maturity of the automotive industry. According to the International Energy Agency, 74.8 million passenger vehicles were sold worldwide in 2022, barely up from the 73.8 million sold in 2012. This doesn’t provide a healthy backdrop for Ford to post outsized profits.
Furthermore, profitability is never anything to write home about. Ford’s 2023 operating margin of 3% is lower than in 2013. Ford’s operations are capital-intensive and therefore always require heavy investments in workforce, research and development, manufacturing capabilities and marketing efforts. This doesn’t give me much reason to be optimistic that the company’s results will improve.
External factors
What makes investing in automakers particularly troubling is the extent to which they are exposed to variables beyond their control. The status of global supply chains or labor relations could have a negative impact on the sector. In addition, changes in interest rates or inflation can put pressure on consumer spending habits, reducing demand for new car purchases.
Even Tesla, the historically fast-growing and now profitable electric vehicle (EV) leader, is starting to realize it can’t escape the problems plaguing the automaker business. The company’s revenue and margins are taking a hit in the current environment.
However, Tesla’s advantage is that it has an economic moat. It has a strong brand, which allows it to command premium prices overall compared to its rivals. And the focus on boosting EV production has resulted in cost advantages in car production.
It’s hard to argue that Ford has its own economic moat. The brand has been around since 1903, but there are numerous larger traditional car companies that also compete on the same factors, whether it be design, price, product features or maintenance and repair requirements. Since Ford’s profitability has not improved over the years, there does not appear to be any economy of scale.
No matter how reasonably valued the stock seems or how high its current 5% dividend yield is, I don’t see Ford delivering returns anywhere near the broader S&P 500 over the long term. And that’s why I won’t touch it with a 3 meter pole.
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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool holds and recommends positions in Tesla. The Motley Fool has a disclosure policy.
1 Stock I Wouldn’t Touch With a 10-Foot Pole was originally published by The Motley Fool
