Should We Consider Surrendering Our Faith in Ford Now?
Should We Consider Surrendering Our Faith in Ford Now?
Here's the paraphrased version of the text:
Ford Motor Company's (F 1.44%) investors have to confront an unfortunate fact: Alan Mulally isn't returning to the Blue Oval offices. Mulally, who led the company during the financial crisis, managed to steer it forward without needing a government bailout. His "One Ford" vision was instrumental in taking the automaker to record profits in a short span of time.
Ever since Mulally retired about a decade ago, Ford seems to have lost its direction. With recent challenges, is it time to abandon the automaker altogether?
A stock stuck in a rut
In terms of investment growth, Ford's stock has been stuck in a rut. Since Mulally retired, the company has experienced a decline of approximately 36% in its value over a decade.
Investors often point to Ford's dividend, which currently offers a yield of 5.7%, as a reason to buy the stock. This dividend certainly adds value, and over time, dividends have represented the majority of the returns for investors.
If you look at the graph above, you'll see that investments, including dividends, have exceeded just the stock price alone. However, this graph fails to consider an important factor: opportunity cost. When you compare Ford's performance with the S&P 500 over the same period, you'll see that even the generous dividend can't keep up.
An endemic issue
You might have heard this before, Ford investors: costs are eating into profits. This issue started more than a year ago when management admitted that it was behind its competitors by billions in costs, a worrisome sign for such an established player in the industry.
Costs and operational efficiency remain ongoing challenges for the automaker. Additionally, Ford has led the U.S. industry in recalls for the past three years, and this has had a significant financial impact.
During the second quarter, Ford spent $2.3 billion on warranty and recall costs, an increase of $800 million compared to the first quarter and over $700 million more than the previous year. With second-quarter adjusted earnings before interest and taxes (EBIT) at only $2.8 billion, these costs are a significant burden.
Warranty costs aren't Ford's only problem. The company is also struggling to reduce costs with its electric vehicles (EVs). Ford's Model E division reported a loss of nearly $3.7 billion in EBIT during the first nine months of 2024, just slightly less than the $3.703 billion in total EBIT generated by its traditional business, Ford Blue, over the same period.
Structural issues
Management is also facing a fundamental challenge, especially in terms of battery costs. Historically, Ford has made most of its profits from highly profitable full-size trucks and SUVs. The problem is that these vehicles don't cost significantly more to produce than sedans, but they can be sold for two to three times the price.
This model has driven the company to profitable years, but as the world shifts towards EVs, this strategy could change. Larger vehicles that were once more profitable now require much larger and more expensive batteries, making traditional products less profitable.
About a decade ago, China was touted as a potential second source of profits for Ford, alongside North America's lucrative business. The market was growing quickly, was already massive, and was ahead of the curve in EV technology.
Fast forward to today, and Ford is closer to exiting China than it is to making it a profitable market. The company is struggling against domestic brands that are years ahead in EV technology and pricing in a market where EVs accounted for 51% of total new vehicle sales as recently as July.
When you look at Ford from top to bottom, you could conclude that it's disorganized. For example, its inventory levels are a mess, with 112 days' worth of stock on lots at the end of September, much higher than the 81-day average for the U.S. industry. High inventory levels put pressure on pricing and production rates.
What it all boils down to
Management is facing significant challenges as the world transitions to a future dominated by EVs and autonomous vehicles. Ford consistently faces cost issues and recall concerns, has failed to turn China into a profitable market, and is bleeding money on EV development. Moreover, it's uncertain about the profitability of its most important products, and its generous dividend can't compensate for the difference in returns between the stock and the broader S&P 500.
For a long-term Ford investor like me, this is a 12-month notice that if there isn't substantial progress from management in terms of costs, recall expenses, and EV losses, I'll be moving my capital to an investment with more potential and less uncertainty. Alan Mulally isn't coming back, and I've been slow to realize how much that matters.
Despite the attractive dividend yield of 5.7%, Ford's stock value has declined by approximately 36% since Mulally's retirement, making some investors question whether it's time to consider other investment opportunities with more potential. Additionally, Ford's ongoing struggles with costs, recalls, and EV development in a rapidly changing market have resulted in significant financial burdens, raising concerns about the company's long-term viability in the finance sector.