The automotive sector is one of the largest and oldest industries. Due to its importance in our society and the overall economy, investors might be looking at this market to find potential businesses to own for the long haul.
Perhaps Ford Motor Company (F 0.27%), which has been around for over a century, has caught your attention. Is this auto stock a smart buying opportunity right now? Here are three factors interested investors should think about to help guide their decision-making process.
Growth potential
Businesses posting surging revenue get a lot of love from investors. Ford doesn’t fall into this category. In fact, its growth prospects aren’t anything to write home about.
In the last 10 years, between Q3 2014 and Q3 2024 (ended Sept. 30), this company saw its sales rise at a compound annual rate of just 2.8%. And based on Wall Street estimates, Ford’s projected revenue in 2026 will be less than 1% higher than the expected total for 2024. That’s not an encouraging outlook.
It partly comes down to the industry, which is very mature. The number of passenger vehicles on the road in the U.S. has increased by only 13.9% between 2012 and 2022, according to the Auto Care Association. There clearly isn’t any growth spurt that will occur, even with the wave of electric vehicles (EV) being pushed to consumers.
I believe it’s reasonable to assume car unit growth to trend as it has in the past. This does not give Ford a robust backdrop to boost its sales over the long term in any significant way.
Ford’s profitability
Another area that investors should analyze is profitability. Companies generating positive earnings are generally preferable to those that post ongoing losses, as it indicates a financially viable business model.
To be clear, Ford is consistently profitable. But not by much. It generated $880 million in operating income in the third quarter on $46.2 billion in total revenue, translating to an operating margin of 1.9%. In the past decade, it’s been the same story, as the operating margin has averaged an extremely disappointing 2%.
I’ll also call out Ford’s return on invested capital (ROIC) of 1.8%. This is substantially lower than the 10% average of the S&P 500. A weak ROIC figure indicates the lack of an economic moat, which is a trait all investors should look for in the businesses they might own, in my opinion.
Maybe it’s just the nature of the auto industry that doesn’t lend itself to having many businesses that are thriving financially. Expenses are high, particularly for research and development, labor, and manufacturing. And competition is fierce, from both domestic and international rivals. This unfavorable setup makes it difficult for Ford to stand out and produce outsize profits, something that should discourage potential investors.
Investor returns
If you’re considering making an investment in Ford, it’s important to also think about the possibility of earning an adequate return on your initial capital outlay. Historically, buying the stock has been a poor use of capital, as Ford has generated a total return of 20% in the last 10 years, trailing the S&P 500’s 246% return by an incredibly wide margin.
The company’s 5.27% dividend yield can be a draw for income-seeking investors. But this sizable payout is masked by the stock price’s poor performance.
The current valuation also doesn’t help. As of this writing, shares trade at a price-to-earnings ratio of 13. That multiple is double that of General Motors and more than 4 times as expensive as Stellantis.
The potential for disappointing shareholders returns, supported by weak growth prospects and subpar profitability metrics, means that Ford stock isn’t a smart investment to make right now.
Neil Patel and his clients have no position in any of the stocks mentioned. 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.