Ford: Buy, Sell, or Hold?

In typical fashion, Ford (NYSE: F) finished 2024 with a disappointing showing for investors. Shares dipped 19% last year. Including dividends, they still lost 13%.

That compares unfavorably to the S&P 500, which produced a total return of 25% in 2024. It's been a similar story over the past decade, as the auto stock has seriously underperformed the broader index.

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With shares trading an alarming 74% below their all-time high, is Ford a buy, sell, or hold right now?

The case to buy and hold Ford stock

One notable reason investors might consider buying Ford shares is because its Pro segment, which caters to business customers with vehicles and various services, is doing remarkably well. In the last nine months, it posted revenue growth of 19% year over year, much faster than the business overall.

Profitability in this segment is also impressive, with a third-quarter operating margin of 11.6%. "Ford Pro continues to be our prototype for sticky, high-margin, noncyclical revenue," chief financial officer John Lawler said on the third-quarter 2024 earnings call.

Ford's valuation is also hard to ignore, given that the stock is well off its peak price. Investors can buy shares at a forward price-to-earnings ratio (P/E) of 5.7, which is near the cheapest they've been in at least three years. The S&P 500 carries a forward P/E multiple of 21.4, indicating just how depressed Ford's valuation has become.

Income-seeking investors will appreciate the current dividend yield of 6.21%. Consistent levels of profitability help fund capital returns. Those hefty dividends are precisely why current Ford shareholders might consider staying put. Holding on to shares leads to ongoing payouts.

Reasons to sell

Many long-term investors aim to own high-quality companies for many years. The primary goal here is to generate market-beating returns. To be clear, Ford doesn't possess traits that give me confidence it can achieve this for your portfolio.

One area that can't be overlooked is growth. Yes, the Ford Pro segment is putting up solid gains, but it's a lone bright spot.

Consider that Ford's third-quarter 2024 revenue of $46.2 billion was just 25% higher than in the same period exactly five years earlier. This is a low-growth business that won't be able to escape the reality of the mature auto industry.

And for all of 2024, Ford reported that it sold 4.2% more vehicle units than the year before. That figure is still well below 2019's level.

The Model e division, which consists of electric vehicle (EV) sales, is struggling mightily. The segment posted a $3.7 billion operating loss in the first nine months of 2024, adding to the $4.7 billion operating loss reported in all of 2023. The auto industry is facing softer EV demand, which likely means more challenges ahead.

No economic moat

If a company doesn't have an economic moat, it's easy for me to pass on the stock. That's because there is a higher chance that existing competitors and new entrants will erode the industry position a business has developed. Ford doesn't have a moat, adding risk for investors.

That perspective is supported by the company's extremely low return on invested capital (ROIC) of 1.8%. The average ROIC of the S&P 500 is 10%. Ford is nowhere near this metric, which is troubling.

To be fair, that's the nature of the automotive industry. It's incredibly capital-intensive, requiring huge research and development budgets, large labor costs, and sizable commodity and input expenses. And this is just to maintain Ford's existing competitive standing, to say nothing about expansion. This isn't an attractive proposition for prospective investors.

Ford's track record for shareholders is disappointing, and that likely won't change. Therefore, the stock is 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.