Ford Motor Company(NYSE: F) recently reported financial results for the first quarter of 2025. Automotive revenue of $37.4 billion and adjusted earnings per share (EPS) of $0.14 both came in ahead of Wall Street estimates. However, trade uncertainties caused the leadership team to pull guidance for the full year.
The market doesn't seem deterred. While the S&P 500 index is flat this year, shares of Ford are up 7% (as of May 13). Perhaps this could be the early indication of a strong run over the next few years.
If a stock doubles over a five-year period, it means that investors achieve a 15% annualized total return. This is a fantastic outcome.
One variable that could drive returns is the dividend, which currently yields 7.03%. This is a sizable payout for investors. In the last 12 months, 60% of Ford's net income went to paying the dividend, so there might be minimal opportunity to increase this. The negative view is that if there is a recession, the company's profitability could take a hit, which will impact the dividend.
Ford shareholders have two other factors that must work in their favor as well. One is the potential for higher EPS. If a business is able to grow its bottom line over time, it usually bodes well for the stock.
Another powerful variable is valuation. As of this writing, Ford stock trades at a price-to-earnings (P/E) ratio of 8.5. This represents a sizable 63% discount to the overall S&P 500. If shares somehow got to their past five-year average P/E multiple of 11.1 by 2030, it would introduce 30% upside for investors.
Pump the brakes
Some investors might find Ford shares an opportunity that's too difficult to pass up right now. However, it's easy to find many traits that point to this being a low-quality business that long-term investors looking to compound capital should avoid at all costs.
Let's look at Ford's track record. In the past 10 years, shares have generated a total return of just 17%. The S&P 500 significantly outperformed the automaker, as investors in the widely followed index would've more than tripled their starting capital.
The global auto industry is very mature. This backdrop doesn't provide Ford with much opportunity to grow at a rapid clip. In the U.S., for example, 17.8 million passenger vehicles were sold on an annualized basis in April, which is about the same number of cars as two decades ago. Unless there is a population surge, or if a sizable chunk of vehicles on the road suddenly breaks down, growth will be muted.
According to analyst estimates, Ford's revenue is projected to increase at a compound annual rate of 0.25% between 2024 and 2027. That's nothing to write home about.
Ford's profitability is also very disappointing. The company's operating margin has averaged just 1.9% in the past five years. There is no sign of economies of scale, or the ability to better leverage expenses to expand the bottom line. Having massive costs for its workforce, research and development, and to operate huge factories, for example, makes things challenging.
I'd also argue that Ford doesn't have an economic moat, something the great Warren Buffett looks for when identifying companies to invest in. Ford's return on invested capital is just 2.5%, which is likely well below its weighted-average cost of capital. This means that the business doesn't possess durable competitive strengths that allow it to financially outperform rivals over an extended period of time.
The stock is cheap, and the dividend yield is high. But I think the chances are slim that Ford shares can double in between now and 2030.
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Neil Patel has 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.
