Should one Consider Purchasing, Selling, or Maintaining Their Ford Stock?
In the typical fashion, Ford ended 2024 on a sour note for investors. Shares slipped a disheartening 19%, resulting in a total loss of 13% when accounting for dividends. This underperformance is striking contrast to the impressive 25% total return produced by the S&P 500 throughout the year.
Over the past decade, Ford has consistently underperformed the broader index, and its shares are currently trading an alarming 74% below their all-time high. So, is this automotive giant a buy, sell, or hold right now?
Buying and Holding Ford Stock
One compelling reason investors might consider buying Ford shares is the exceptional performance of its Pro segment. This business-focused division, which caters to commercial customers with vehicles and services, has posted revenue growth of 19% year over year in the last nine months. The segment's remarkable third-quarter operating margin of 11.6% has also caught the attention of finance executives, with chief financial officer John Lawler dubbing it as a prototype for sticky, high-margin, noncyclical revenue.
Ford's valuation is another enticing factor. With shares trading at a forward price-to-earnings ratio (P/E) of 5.7, the stock is significantly undervalued compared to the S&P 500, which carries a forward P/E multiple of 21.4. Income-seeking investors will also appreciate the current dividend yield of 6.21%, which ensures consistent levels of profitability and dividend payouts.
Selling Ford Stock
However, the story is not all rosy for Ford. Its growth potential is a primary cause for concern. While the Ford Pro segment is thriving, it's the only silver lining in an otherwise lackluster performance. Consider that Ford's third-quarter revenue of $46.2 billion is just 25% higher than the same period five years ago, indicating a low-growth business that's struggling to break free from the mature auto industry.
Ford's EV division is not faring any better, with the segment posting a staggering $3.7 billion operating loss in the first nine months of 2024. The auto industry is currently facing softening demand for EVs, which may mean more challenges ahead.
Furthermore, Ford lacks a noteworthy economic moat. A company without an economic moat is at risk of being eroded by existing competitors and new entrants, as seen in Ford's relatively low return on invested capital (ROIC) of 1.8%. This metric is far below the average ROIC of the S&P 500, which stands at 10%, casting doubt on the company's ability to generate impressive returns for shareholders.
The Verdict
In conclusion, Ford presents a complex case for investors. The company's strong Pro segment and undervalued stock may appeal to some, while its sluggish growth, underperforming EV division, and lack of an economic moat are causes for concern. A balanced approach, considering both short-term and long-term factors, might be the most prudent strategy for those considering buying, holding, or selling Ford stock.
Given Ford's strong performance in its Pro segment and its undervalued stock with a high dividend yield, some investors might consider investing in Ford shares. However, the company's slow growth, struggling EV division, and lack of a significant economic moat are potential red flags that warrants careful consideration before investing any money.
