Is Ford Stock a Buy?

Ford (F 1.59%) has been a huge disappointment. In the past decade, shares have produced a total return of just 3%. Investors who put money in an index fund tracking the S&P 500, on the other hand, would've grown their capital by an astonishing 235%. But as this auto stock trades down 28% this year, is it a smart buy right now for long-term investors? Let's consider the bull and bear cases for Ford. What Ford bulls say Ford's compelling valuation is one obvious positive to highlight. As of this writing, shares trade at a forward price-to-earnings ratio of only 5.6. In comparison, the S&P 500's multiple is about four times that at 22.5. It's hard not to get excited about a stock that looks so cheap, particularly when the market is near all-time highs. The low valuation also means that Ford currently has a dividend yield of 5.7%. Investors who prioritize earning income from the companies they own could do far worse. Ford reported adjusted diluted earnings per share of $0.47 in the second quarter (ended June 30), severely missing Wall Street estimates. Higher warranty costs were the key culprit, as the business was forced to set more capital aside in reserves. But management is optimistic. "Efforts to lift the quality of new products are starting to pay off, with positive implications for customer satisfaction and Ford's operating performance," the latest press release reads. Improvements here could provide a near-term profit tailwind. A bright spot within Ford is the pro segment, which sells commercial vehicles and software solutions. Revenue was up 9% last quarter, much faster than the business overall. And this division generated a fine 15.1% operating margin. "Ford Pro is the prototype for sticky, high-margin noncyclical revenue," CFO John Lawler said on the Q2 2024 earnings call. What Ford bears say Ford bears can point to several negative factors. And I think these issues are nothing new. For starters, Ford doesn't possess a robust financial profile. Its profitability is extremely disappointing. In the past 10 years, the operating margin has averaged 1.9%. This points to the nature of the auto industry. It's very capital-intensive, and there are many costs that Ford has minimal control over, like labor or production inputs. Moreover, it must always spend a lot on research and development as well as marketing. Even worse, the industry doesn't experience much meaningful growth. Ford's 2023 total revenue of $176 billion was just 20% higher than in 2013. Given that the number of cars sold worldwide increased at an annualized pace of 1% between 2010 and 2022, it doesn't provide a robust backdrop for a company like Ford to flourish. This will likely remain the case moving forward. The EV segment, known as Model e, is struggling mightily. Sales rose 37% in Q2, but through the first six months of this year, the operating loss totaled a troubling $2.5 billion. With consumer demand weakening, it's hard to know when the EV division will transition from a major headwind to a tailwind. Warren Buffett popularized the phrase "economic moat." High-quality companies that fend off competitors for long periods possess these sorts of sustainable competitive advantages. Unfortunately, Ford doesn't fall into this category. One might argue its brand and scale are strengths. However, I disagree. There are even bigger and more powerful global auto brands that compete on all the same factors as Ford. And considering its alarmingly low return on invested capital of 8.2%, it's not hard to believe that this is a subpar business that sucks up capital. I believe the bear case is more convincing. Therefore, I don't believe Ford is a smart stock to buy right now.