Despite being a well-known American car maker, Ford (NYSE: F) is a huge disappointment for its investors. In the past five years, shares have produced a total return of just 30%. This gain seriously lags the almost 100% total return of the S&P 500 .
This year has brought shareholders more pain, as Ford is down 20% in 2024 (as of Aug. 6). But maybe it's time to take a chance on the business.
Should you buy this auto stock on the dip?
Ford's disappointing Q2
Investors shouldn't ignore Ford's latest financial results , which were awfully disappointing. In fact, shares took a huge hit immediately following the announcement.
The business missed Wall Street estimates by a wide margin, posting adjusted diluted earnings per share of $0.47 in the second quarter (ended June 30), compared to a $0.68 consensus expectation. That was down 35% year over year.
Significantly higher warranty costs, due to major quality issues, deserve some blame. Ford spent $800 million more on warranties and recalls in Q2 than in the first quarter this year.
The company's Model e segment, which houses its electric vehicle (EV) operations, continues burning money in spectacular fashion. While revenue soared 37% year over year, the operating loss totaled more than $1.1 billion. The Model e division has now lost a gut-wrenching $2.5 billion in the past six months. It's anyone's guess when things will turn around.
The notable bright spot was Ford's pro segment. The commercial-focused entity grew sales by 9%. It also posted an impressive operating margin of 15.1%, much higher than the legacy Ford Blue division.
Cheap for a reason
Based on the stock's huge hit, it's obvious that the market is becoming very pessimistic about Ford's prospects. The fact that the stock trades at a forward price-to-earnings ratio of just 5.2 is telling. This is its lowest valuation since at least the start of 2022, and it's a massive 80% discount to the S&P 500's multiple.
Consequently, as of this writing, Ford pays out a hefty dividend yield of 6.2%. Perhaps income-seeking investors will appreciate this.
However, I believe Ford looks like a classic value trap . It's cheap for a reason. Historically, shareholders haven't been rewarded with strong returns from owning this stock. I don't think this is going to change anytime soon.
One reason not to buy shares is because of the company's low growth prospects. Revenue of $47.8 billion in Q2 was only 28% higher than in the same period 10 years ago. The auto industry is very mature, which doesn't provide Ford with a robust backdrop to boost its unit volume.
Besides muted growth potential, the industry is extremely competitive. People make their purchasing decisions based on features, pricing, safety, fuel economy, and maintenance, for example. Ford doesn't particularly stand out in any of these areas. Making matters worse, there are many other global car makers all trying to do the same thing. So, I don't believe Ford possesses an economic moat , and that's a clear indication that it isn't a high-quality enterprise.
Poor profitability trends are another reason to avoid Ford. In the past five years, the company's operating margin has averaged a measly 1.3%. There is also no sign of economies of scale inherent in the business model.
Lastly, Ford's financial success is overly sensitive to factors outside of its control. There are industry-specific variables, like supply chains. There are also macro factors, such as interest rates. This makes the business incredibly cyclical.
Ford shares have tanked in the past couple of weeks. That doesn't mean you should buy the stock on the dip.
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 .
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