Between the start of the year and mid-July, shares of Ford Motor Company(NYSE: F) soared 31%, only to tank 17% in the past couple months. It looks like pessimism around the business is in full effect. The roller coaster ride might make some uneasy, especially since Ford has posted solid financial results recently.
Should investors buy this top auto stock right now on the dip? There's a lot to know about what's going on with this company before making a decision. Let's take a closer look at Ford.
Strong momentum
It's easy to get excited about Ford based just on its strong financial performance in 2023. Take the first three months of the year. The business posted revenue of $41.5 billion (up 20% year over year) and diluted earnings per share (EPS) of $0.44, a huge reversal from the $0.78 loss in the year-ago period. And in Q2, Ford's sales were up 12%, with diluted EPS nearly tripling from Q2 2022.
For both the top line and bottom line, Ford was able to handily beat Wall Street estimates in each of the last two quarters. That's all the more impressive given what has happened with interest rates. Higher rates make buying new cars less affordable for consumers, yet Ford has reported great numbers.
Management demonstrated its optimism by raising full-year guidance. They now expect adjusted operating income to come in between $11 billion and $12 billion, and adjusted free cash flow between $6.5 billion and $7 billion. Strong demand and pricing are key factors that led to the upgraded outlook.
The most recent news that's captivating investors is the United Auto Workers strike. Workers at all three of the major domestic automakers walked out at midnight on Sept. 15 due to the inability to come to a fresh deal. This only affects one of Ford's factories in Michigan, but it's important to pay close attention to developments, as a prolonged and more severe strike could have a huge impact on the production capacity of new vehicles, which could result in higher pricing and lower inventory availability.
Betting on an electric future
While the overall business looks to be in a favorable position, digging deeper gives investors a different picture. Ford Model e, the company's electric vehicle (EV) segment, is now forecast to register a whopping $4.5 billion operating loss this year, a huge bump from $3 billion in 2022. This was despite revenue for the division jumping 39% in the most recent quarter.
Unsurprisingly, Ford's playbook is to continue investing in manufacturing capabilities, with the hope being that greater scale will eventually lead to consistent profits. The company has set a goal of producing 600,000 EVs in 2024.
EVs look poised to continue their strong growth in the decade ahead, so I think Ford is making the right strategic decision to invest heavily behind this shift. But the big question remains when, if at all, Ford Model e will become profitable. There's so much competition in the space right now that will make this outcome challenging to achieve, but Ford's long history has certainly created loyal fans who would likely transition to its new EV products.
Cheap for a reason
Impressive business momentum and a potentially bright future in EVs aren't enough to overcome the negative aspects of Ford. Even with an electric future on the horizon, this company's growth prospects aren't anything to write home about. Moreover, Ford is an incredibly cyclical enterprise. Investors who want to buy shares need to correctly time the economic cycle, aiming to buy right before macro factors start to improve. That's an extremely difficult task to pull off successfully.
From a financial perspective, it's also discouraging to see just how much capital Ford requires to not only maintain its current operations, but to invest for the paltry growth prospects it has in front of it. Persistently low margins, intense competition, and the ongoing labor disputes are other things that can keep investors up at night.
I'm passing on the stock without hesitation. I believe you should, too.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.