Despite being a well-known American car manufacturer, ford (NYSE: F) is a huge disappointment to its investors. Over the past five years, equities have delivered a total return of just 30%. This return lags far behind the nearly 100% total return of the S&P 500.
This year has hurt shareholders more, with Ford down 20% through 2024 (as of Aug. 6). But maybe it’s time to give the company a chance.
Should you buy this? car stock on the dip?
Ford’s disappointing second quarter
Investors should not ignore this Ford’s Latest Financial Resultswhich were hugely disappointing. In fact, stocks took a huge hit immediately following the announcement.
The company missed Wall Street estimates by a wide margin, reporting adjusted diluted earnings per share of $0.47 in the second quarter (ended June 30), compared with consensus expectations of $0.68. That was a 35% year-over-year decline.
Significantly higher warranty costs, due to major quality issues, deserve some blame. Ford spent $800 million more on warranties and recalls in Q2 than in the first quarter of this year.
The company’s Model e segment, which houses its electric vehicle (EV) business, continues to burn cash at a spectacular clip. While revenue rose 37% year-over-year, operating losses topped $1.1 billion. The Model e division has now lost a heartbreaking $2.5 billion in the past six months. It remains to be seen when the tide will turn.
The bright spot was Ford’s pro segment. The commercially focused entity saw sales grow 9%. It also posted an impressive operating margin of 15.1%, much higher than the old Ford Blue division.
Cheap for a reason
Given the stock’s massive hit, it’s clear that the market is getting very pessimistic about Ford’s prospects. The fact that the stock is trading at a forward price-to-earnings ratio of just 5.2 is telling. That’s the lowest valuation since at least early 2022, and it’s a whopping 80% discount to the S&P 500 multiple.
As a result, Ford is paying a solid 6.2% dividend yield at the time of writing, which may appeal to income-seeking investors.
I think Ford looks like a classic though depreciation. It’s cheap for a reason. Historically, shareholders have not been rewarded with strong returns for owning this stock. I don’t think that’s going to change anytime soon.
One reason not to buy the stock is the company’s low growth prospects. Revenues of $47.8 billion in Q2 were only 28% higher than the same period a decade ago. The auto industry is very mature, which doesn’t provide Ford with a robust backdrop to grow unit volume.
In addition to the muted growth potential, the industry is extremely competitive. People base their purchasing decisions on features, price, safety, fuel economy, and maintenance, for example. Ford doesn’t really excel in any of these areas. And to make matters worse, there are many other global automakers all trying to do the same thing. So I don’t believe Ford is a economic canaland that is a clear sign that it is not a high quality company.
Poor profitability trends are another reason to avoid Ford. Over the past five years, the company’s operating margin has averaged a paltry 1.3%. There’s also no sign of the economies of scale inherent in its business model.
Finally, Ford’s financial success is hypersensitive to factors outside the company’s control. There are industry-specific variables, like supply chains. There are also macro factors, like interest rates. This makes the company incredibly cyclical.
Ford stock has been falling in recent weeks. That doesn’t mean you should buy the stock if it’s falling.
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Down 20% Through 2024, Is Ford Stock a Buy on This Dip? was originally published by The Motley Fool
