Is Ford Stock a Buy?

Through the first seven and a half months of this year, shares of Ford (NYSE: F) were up 19%. But after the business reported weaker-than-expected second-quarter earnings due to elevated warranty costs, investors ran for the exits.

Ford's price performance is now in the red for the year, as market sentiment sours. But is this top automotive stock still a smart buy? Let's look at the bull and bear cases to gain a better understanding of Ford's situation.

Pockets of positivity under the hood

One reason that investors might want to buy Ford is because of one thriving segment: Ford Pro. This division sells vehicles and various services to commercial customers, and it has been performing extremely well. Revenue in the first six months of 2024 was up 21% year over year. And Ford Pro reports a superb 15.9% operating margin, much better than the company overall.

"Our Ford Pro business is amazing," CEO James Farley said on the Q2 2024 earnings call.

Ford shares currently trade 27% off their 52-week high. Consequently, interested investors might think the valuation is too hard to ignore. The stock can be bought for a price-to-earnings (P/E) ratio of 11.1. That's less than half the valuation of the overall S&P 500.

This is generally a consistently profitable company. And that steady bottom-line performance gives the leadership team the resources to pay a sizable dividend that yields an impressive 5.6%. In the face of what could be the start of declining interest rates, that can undoubtedly be compelling for income-seeking investors who desire a steady payout from the businesses they own.

Slam the brakes on Ford stock

Ford Pro might be firing on all cylinders, but Ford Model e, where the company's electric vehicle (EV) ambitions are housed, is struggling mightily. The segment posted a troubling 50% year-over-year revenue drop in the last six months, and it reported an alarming $2.5 billion operating loss. There's no telling when EVs will become profitable, so the division will continue to be a drag on Ford's financial performance.

When I look to buy businesses for my portfolio, I prioritize companies that possess an economic moat. There needs to be a sustainable competitive advantage that helps a business outperform existing competitors and new industry entrants. In my opinion, this is the sign of a high-quality enterprise.

I'd argue that Ford doesn't fit into this exclusive club. In the past decade, its return on invested capital (ROIC) has averaged 2.5%. That's extremely disappointing. In fact, the highest ROIC during that period was just 9.7%, which is lower than the 10% current average ROIC of the S&P 500. Ford is arguably a subpar company.

The auto industry isn't attractive from an investment perspective. And Ford can't escape this reality. Financial results can be very sensitive to the economy. Should there be a recession, sales and profits will likely take a major hit.

Also, companies must always be investing heavily in manufacturing and research and development. This is table stakes simply to maintain the current competitive position. If Ford stopped allocating capital here, it would lose market share to rivals.

Profit margins are low due to huge costs, and the long-term growth outlook isn't anything to write home about. Passenger vehicle sales worldwide typically increase at a 2% to 3% yearly rate. This doesn't provide Ford with a favorable tailwind to grow the top line meaningfully.

The momentum Ford is seeing in its Pro business, coupled with the low valuation and high dividend yield, can certainly be compelling for some investors. However, I view the bear case as being much more convincing. Ford is a stock that's best avoided.

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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.