Is Ford Stock a Buy?
Describing Ford Motor Company (F 0.25%) as a disappointing investment would be an apt depiction. Over the past five years, the company's shares have only managed to increase by a mediocre 37%, which is significantly behind the S&P 500. Moreover, in the last ten years, the shares have actually declined by 11%. This undeniably falls short of expectations for investors.
However, there is a possibility that the future will bring about changes. Ford recently released its financial performance for the first quarter, surpassing the predictions made by experts on Wall Street. This serves as a strong indication of a promising trend. Additionally, shareholders have a positive outlook on the company's plans to develop electric vehicles (EVs).
Should we consider purchasing Ford stock at this moment? Prior to reaching a conclusion on that matter, let's analyze the positive and negative points raised by supporters and critics of this leading automobile company.
Bulls Press The Gas!
Ford made a big change in March 2022 by rearranging its operations. The goal of this move was to realign resources according to different goals, and it resulted in the company being divided into three divisions: Ford Blue (legacy), Ford Pro (commercial), and Ford Model E (EV). Ford estimates that it will have to spend up to $2 billion on this restructuring in the current year. However, the company believes that this change will ultimately increase its operating margin in the long run. It's clear that Ford is making an effort to position itself better for the future, and investors can definitely appreciate this.
When it comes to alterations, the company is dedicating substantial resources to its electric vehicle (EV) endeavors. Ford has already introduced popular car models like the F-150 Lightning and the Mustang Mach-E, positioning itself as the third-largest player in the local market for new EV purchases. However, the company aims to manufacture 2 million EV units per year by 2026, and by 2030, they aspire to have half of their global sales generated from EVs.
This procedure won't come at a low cost, as Ford allocates extensive resources to boost its manufacturing capabilities. The electric vehicle (EV) division incurred a significant operating deficit of $700 million in the previous quarter, placing a burden on the company's overall finances. The management team anticipates achieving an operating margin of 8% by 2026 as Ford increases its vehicle sales, with the hope of reaping economies of scale in the EV sector similar to its traditional segment.
I observed that investors have been let down by the performance of Ford's stock. However, there is a positive aspect to consider. The company generates a significant amount of cash flow without any restrictions, amounting to a noteworthy $9.1 billion in the year 2022. As a result, Ford is able to provide substantial dividends to its shareholders. At present, the company's dividend yield stands at a commendable 4%.
Bears Halt Momentum
Ford's main persuasive point revolves around the fact that the auto industry is highly susceptible to economic changes that are beyond the company's influence. The success of car sales greatly depends on factors like low interest rates, low unemployment rates, and a thriving economy. On the flipside, adverse conditions can be catastrophic. When there is a decline in sales alongside significant fixed costs, it creates a worrisome situation. Ford's profit margin over the last decade has averaged at 3.5%, indicating that even slight fluctuations in sales can be alarming.
In addition, the way Ford operates requires significant financial investments. These investments are necessary for acquiring machinery and establishing factories to manufacture vehicles, as well as for accommodating and developing its extensive workforce and conducting research and development on electric vehicles, which all come with substantial costs. Therefore, potential investors must be comfortable with this reality of demanding capital investments before considering purchasing the company's stock.
Next, let's talk about the absurd rivalry in the automobile industry. People have a plethora of choices when it comes to purchasing a new car, ranging from local companies to international automakers. Consequently, car manufacturers are compelled to engage in intense competition on pricing, resorting to the distribution of different incentives to boost consumer interest. Consequently, Ford's already narrow profit margins face additional constraints.
Increased competition also poses significant challenges in achieving substantial growth. Ford not only demands substantial financial resources to operate and expand, but it also faces competition from well-funded competitors striving to accomplish the same goals in an established industry. It's an arduous situation to be in.
In my viewpoint, I find the bear positions more convincing, which is why I believe the stock isn't a wise investment. Nevertheless, the substantial dividend return might appeal to individuals who prioritize receiving a consistent income from their investments.
Neil Patel does not have any shares in any of the stocks mentioned. The Motley Fool also does not have any shares in any of the stocks mentioned. The Motley Fool follows a policy of transparency and disclosure.
