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Is Ford Stock a Buy?

Motley Fool - Thu Oct 12, 2023

Ford(NYSE: F), as well as the rest of the "Big Three" Detroit car makers, are dealing with unionized strikes that have halted operations at select factories. This is certainly a situation to monitor as the outcome is still unknown.

Some might view this as the right time to sell shares, while those who have a more upbeat outlook might view the recent 21% dip in the share price (since the 52-week high on July 12) as a potential buying opportunity.

Before making an informed decision about this top auto stock, investors should understand both the bull and bear arguments. Let's take a closer look at Ford.

Reasons to own shares

It's hard to deny how great Ford's latest financials have looked. Revenue in the most recent quarter (second quarter of 2023, ended June 30) was up 12% year over year after rising 20% in the first quarter this year. Management points to pricing power and strong demand as the key reasons for the strong gains, which are a marked improvement from a couple of years ago when supply chain issues rattled the industry. And diluted earnings per share in Q2 jumped to $0.47 versus just $0.16 in the year-ago period.

Additionally, Ford upped its guidance for the full year. Executives now expect adjusted operating income to total $11.5 billion (at the midpoint).

The business is investing heavily as the world transitions from gas-powered cars to electric vehicles (EVs). Ford Model e is the company's segment that focuses on these initiatives. It grew revenue 39% in the latest quarter.

While this division loses a lot of money currently, posting an operating loss of $1.8 billion in the last six months, the hope is that Ford can utilize its design, manufacturing, and marketing capabilities that have worked for its legacy business lines to bolster its EV push. The Mustang Mach-E and F-150 Lightning are two popular models that are attracting consumer attention. Maybe this can spur notable growth over the next decade and beyond.

Ford shares are currently 52% below their all-time high from January 2022. As a result, investors aren't being asked to pay a steep valuation for the stock, as it trades at a forward price-to-earnings ratio that's below 5.9 right now. This is a sizable discount to the trailing two-year average of 7.3, and it's much cheaper than the average company in the S&P 500 index. Some investors might find this deal too hard to pass up.

Reasons investors should avoid the stock

Despite Ford's investment merits, there are must-know reasons to stay far away from this stock. For starters, it's almost impossible to overstate how intense the competition is in the industry. Ford has long had to deal with domestic automakers like General Motors and Stellantis, as well as formidable international opponents, namely Toyota, Honda, Nissan, and Hyundai. When it comes to EVs, Ford trails far behind Tesla, the leader in the space.

From a consumer perspective, having so many options when it comes to buying a vehicle means that it's that much harder for any single company to stand out. To be fair, some cars stand out due to their high-end luxury status in the marketplace, but Ford isn't one of them. Competition is something prospective investors have to be OK with.

The auto industry is also notoriously cyclical, being hugely impacted by macroeconomic factors like interest rates, consumer confidence, and unemployment levels. This is the reality for businesses that sell high-ticket items. In a recessionary scenario, these purchases can be delayed, placing companies in a challenging operating environment.

Ford's financials have also never been anything to write home about. In the last 10 full fiscal years, from 2013 through 2022, the company's operating margin has averaged just 7.5%. This is indicative of how hard it is to generate outsized profits, mainly due to high competition and the capital-intensive nature of the industry.

Speaking to that last point, Ford will always have to invest heavily in its operations, which is a huge disadvantage compared to many asset-light businesses out there, particularly in the tech sector. Designing and manufacturing automobiles, building and upgrading factories, and putting capital toward EV ambitions is expensive. And with low growth prospects, this looks like an unattractive setup.

Considering both the bull and bear cases for this stock, I think investors would be smart to avoid Ford.

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends General Motors and Stellantis and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.

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