Detroit automaker Ford Motor Co. (F) is at a crossroads with the global auto industry undergoing monumental changes. The company’s latest results show it continues to perform well in some areas but faces big challenges in others. As Ford pivots toward the electrification of its vehicle fleet, the company’s share price has been under pressure and is down 10% this year. Accordingly, I am neutral on the stock.
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Ford’s Resilience and Struggles
My neutral stance on Ford was reinforced by the company’s second-quarter financial results, which showed both resilience and signs of strain at the company. Revenue for the quarter came in at $47.8 billion, up 6% year-over-year, driven by strong sales of gas-electric hybrid vehicles and commercial trucks. Hybrid sales surged 34%, and Ford Pro, its commercial fleet, delivered an impressive 15.1% profit margin. Moving forward, Ford should continue to benefit from growth in these revenue drivers.
However, there are signs of trouble lurking beneath the surface at Ford. The company’s Q2 earnings of $2.8 billion were down 27% from a year ago due to rising costs linked to warranty claims, materials, and manufacturing. The Model e division, which focuses on electric vehicles (EVs), continues to struggle and posted a loss of $1.1 billion for the quarter. This reflects broader pressures in the EV market, where intense competition has led to price discounts and margin erosion.
Ford’s Market Leadership
As mentioned, there are both positives and negatives at Ford right now, leading me to feel neutral on F stock. One of the big positives is Ford’s leading position in gas-electric hybrids and commercial vehicles. Ford is currently the number one gas-powered and number two electric vehicle maker in the U.S. based on sales. The success of its hybrid lineup, particularly the F-150 hybrid pick-up truck, builds on the company’s sales strength. Sales of hybrid pick-up trucks grew at three times the rate of the overall hybrid market, positioning Ford to capitalize on this trend moving forward.
Ford Pro, the company’s commercial fleet business, is expected to contribute heavily to the company’s growth in coming quarters. The division is expanding its offerings of both vehicles and services such as charging depots. With 610,000 paid software subscriptions, and a growing market for service-related revenue, Ford is leveraging its fleet to create new, high-margin revenue streams.
Competition and Cost Pressures
On the downside, and the main reason I am neutral on F stock, is the competition and cost pressures impacting the company. Ford’s push into electric vehicles presents risks. Its Model e division remains unprofitable and faces intense competition from Tesla (TSLA) and other vehicle manufacturers. Ford CEO Jim Farley has acknowledged Ford’s need to lower its production costs and avoid launching electric vehicles at a loss. Price discounts to gain market share , excess capacity, and consumer hesitancy around electric vehicle adoption further complicate Ford’s electrification strategy.
Beyond electric vehicles, Ford faces cost pressures across its entire operation, further weakening its appeal. Warranty claims and inflationary pressures on materials continue to hurt the company’s margins. These costs, tied to new technologies and the scaling of electric vehicle production, present a headwind as Ford attempts to balance profitability and growth in a shifting industry.
Ford’s Valuation
Ford’s current valuation highlights the market’s skepticism about the company’s ability to navigate its challenges. Ford is expected to post earnings per share (EPS) of $1.90 this year, but Wall Street remains divided on whether the company can build on this performance going forward. The stock currently trades at a forward price-to-earnings (P/E) ratio of 5.2, which is near a multi-year low and well-below the average forward P/E ratio of 27.44% among stocks trading on the benchmark S&P 500 index.
These depressed multiples reflect investors’ doubts about Ford’s ability to compete effectively in the electric vehicle space and manage rising costs. However, these low multiples also present potential upside if Ford can successfully execute its strategy. Should Ford improve the profitability of its electric vehicle division, capitalize on its strong hybrid and commercial vehicle segments, and manage costs effectively, the stock could rise in coming months.
Is Ford Stock a Buy or Sell?
There is a consensus Moderate Buy rating on F stock among 15 Wall Street analysts who cover the company. This rating is based on five Buy, nine Hold, and one Sell recommendations issued in the past three months. The average price target on Ford stock of $13.67 suggests upside potential of 24.39%.
If you’re wondering which analyst to follow concerning Ford stock, the most profitable analyst (on a one-year timeframe) is Michael Ward‘ from Bank of America Securities (BAC), with an average return of 11.53% per rating and a 43% success rate.
Read more analyst ratings on F stock
Conclusion:
Ford’s future hinges on its ability to navigate a rapidly evolving automotive industry. The company’s leadership in hybrids and commercial vehicles provides a solid foundation, but its electric vehicle unit faces challenges from competitors and rising costs. At the same time, there is potential for F stock to rise if the automaker can execute its electrification strategy and control costs. While, I believe that Investors should remain cautious, those willing to take risks may find Ford’s long-term prospects attractive.
