The year 2024 has been a rather tough one for the U.S. legacy automaker Ford F. Shares of the company have declined roughly 15% so far this year, massively underperforming its industry, sector, and the S&P 500. Its closest peer General Motors GM has gained almost 45% year to date.
Despite being in the business for more than a century, Ford is grappling with several challenges, which are hurting its price performance, making investors and analysts seemingly lose confidence in the stock.
Ford’s earnings performance in the first three quarters of the year has been checkered, with the company missing estimates once, matching once and topping in the other. In contrast, GM surpassed earnings expectations in each of the trailing three quarters, reflecting robust demand and effective cost management.
In the last reported quarter, Ford’s net income fell 25%. The company also slashed its 2024 adjusted EBIT forecast. Its weak electric vehicle (EV) business, warranty and quality issues and high competition are weighing on the stock badly, making investors wonder whether this automotive giant could shift its gears next year.
YTD Price Performance Comparison
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Ford Model e Unit: A Major Deterrent
Ford’s EV business division — Ford Model e — is dragging the company’s overall results. The unit incurred losses of $4.7 billion in 2023 owing to high investments in next-gen products. Ford anticipates full-year loss from the Model e unit to widen to around $5 billion, exacerbated by ongoing pricing pressure and increased investments in next-generation EVs. High competition in the EV space only adds to the woes.
While Ford had to scale back its EV production amid slower-than-expected adoption, eventually e-mobility will be the future of transportation. And Tesla TSLA is likely to continue to command a dominant share of the market, creating a challenging environment for competitors. As it is, Donald Trump’s election win has created more uncertainty in the EV market as he intends to repeal the $7,500 EV tax credit. This will hurt traditional automakers like Ford, which still lean heavily on EV tax credits.
And then there are customers who are still hesitant to fully embrace EVs and turn to companies like Toyota and Honda for their popular hybrid models, further sidelining Ford in this competitive landscape. All in all, Ford’s efforts to establish a financially sustainable EV segment have been impressive, leaving much room for improvement in its pursuit of long-term profitability.
Warranty Expenses Remain a Major Overhang for Ford
Ford continues to grapple with high warranty expenses, which presents significant challenges. Quality issues, particularly with older models, have driven warranty costs to soar, with the company reporting an $800 million increase in such expenses, reaching $2.3 billion in the second quarter of 2024. Though management intends to address these issues, it has cautioned that a resolution is unlikely within the next year, at the very least.
The automaker's CFO, John Lawler, highlighted on the last earnings call that while Ford achieved a $2 billion reduction in material and manufacturing costs, these improvements have been largely offset by inflation and warranty-related expenses. These factors have curtailed Ford’s ability to achieve record financial performance this year. Amid cost headwinds, Ford expects EBIT from its Ford Blue unit to decline from $7.5 billion in 2023 to $5 billion this year due to higher product manufacturing and warranty costs.
Trump Tariff Threats to Hit Ford
Trump has vowed to implement a 25% tariff on all imports from Mexico and Canada upon taking office, a move that could have significant implications for the North American auto industry. Ford, the second-largest exporter of vehicles from Mexico after General Motors, stands to face substantial headwinds. For decades, free trade agreements between the United States, Canada and Mexico have allowed automakers to develop cost-efficient, cross-border supply chains. However, the proposed tariffs threaten to disrupt this tightly integrated ecosystem.
A 25% levy would sharply increase production costs, likely driving up the prices of new vehicles in the United States. This would not only impact Ford’s profitability but also raise the cost of parts sourced from Mexico, further inflating production expenses for its U.S.-based plants. Popular SUVs and pickups, which are key revenue drivers for Ford, could see price hikes that deter consumer demand, compounding the company’s challenges.
Ford’s Struggles Highlight its Lack of a Competitive Edge
Ford’s return on invested capital (ROIC) of just 2.26% (lower than its peers) underscores its capital-intensive nature, offering insufficient returns for its substantial investments. For investors seeking companies with economic moats—a key to long-term success—Ford’s profitability metrics suggest it lacks a lasting competitive edge. The automaker’s financials fall short of delivering the payoff investors might expect.
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What Do Estimates Say for F?
The Zacks Consensus Estimate for Ford’s 2024 EPS is pegged at $1.81, implying a 10% year-over-year decline. The consensus mark for 2025 sales and EPS suggests year-over-year contraction of 3.5% and 4.4%, respectively. The earnings estimates for the company have been trending south.
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Ford’s Path to Recovery Uncertain
Ford’s journey into 2025 is marked by uncertainty and significant challenges. While its Pro division and attractive dividend yield offer a glimmer of hope, persistent EV losses, quality issues and rising costs cast a shadow over its near-term outlook. The company's struggles with execution and market competition make it a risky bet for now. Investors seeking clarity should wait for concrete signs of improvement in profitability and operational efficiency. Until Ford addresses these hurdles, its stock may remain under pressure. It might be wise to hold off on investing in Ford for now.
Ford currently carries a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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