Ford Motor Co. (NYSE:F)'s waning role in a changing market

Detroit-based automaker Ford Motor Co. (F) is at a crossroads as the global auto industry undergoes tremendous changes. The company's recent results show that it continues to perform well in some areas, but faces significant challenges in others. As Ford focuses on electrifying its vehicle fleet, the company's share price is under pressure and has fallen 10% this year. Therefore, I am neutral on the stock.

Ford’s resilience and struggles

My neutral stance on Ford was reinforced by its second-quarter financial results, which showed both resilience and signs of strain at the company. Revenue for the quarter was $47.8 billion, up 6% year over year, driven by strong sales of gasoline-electric hybrids and commercial vehicles. Hybrid sales rose 34%, and Ford Pro, its commercial vehicle fleet, delivered an impressive 15.1% profit margin. Looking ahead, Ford should continue to benefit from growth in these revenue drivers.

But there are signs that problems are lurking beneath the surface at Ford. The company's second-quarter profit of $2.8 billion was 27% lower than a year earlier, due to rising costs related to warranty claims, materials and manufacturing. The Model E division, which specializes in electric vehicles (EVs), continues to struggle, posting a loss of $1.1 billion for the quarter. This reflects general pressure in the EV market, where intense competition has led to price discounting and margin erosion.

Ford's market leadership

As mentioned, there are both positives and negatives about Ford right now that lead me to a neutral stance on F stock. One of the big positives is Ford's leadership in gasoline-electric hybrids and commercial vehicles. Based on sales, Ford is currently the leading manufacturer of gasoline vehicles and the second-largest manufacturer of electric vehicles in the U.S. The success of its hybrid lineup, particularly the F-150 hybrid pickup truck, builds on the company's sales strength. Sales of hybrid pickup trucks grew three times faster than the overall hybrid vehicle market, so Ford can benefit from this trend going forward.

Ford Pro, the company's commercial fleet business, is expected to be a major contributor to the company's growth in the coming quarters. The division is expanding its offerings of vehicles and services such as charging stations. 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.

Competitive and cost pressure

On the negative side, and the main reason I'm neutral on F shares, is the competition and cost pressures weighing on the company. Ford's foray into electric vehicles comes with risks. The Model E division remains unprofitable and faces stiff competition from Tesla (TSLA) and other vehicle makers. Ford CEO Jim Farley has acknowledged that Ford needs to reduce its production costs and avoid launching electric vehicles at a loss. Discounting to gain market share, excess capacity and consumer reluctance to adopt electric vehicles further complicate Ford's electrification strategy.

Beyond electric vehicles, Ford faces cost pressures across the board, further weakening its attractiveness. Warranty claims and inflationary pressures on materials continue to weigh on the company's margins. These costs, associated with new technologies and scaling up electric vehicle production, represent a headwind as Ford tries to balance profitability and growth in a changing industry.

Ford's rating

Ford's current valuation underscores the market's skepticism about the company's ability to overcome its challenges. Ford is expected to report earnings per share (EPS) of $1.90 this year, but Wall Street remains divided on whether the company can build on that performance going forward. The stock currently trades at a price-to-earnings (P/E) ratio of 5.2, which is near a multi-year low and well below the 27.44% average P/E of stocks traded in the benchmark S&P 500 index.

These low 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 offer upside potential if Ford can successfully execute its strategy. If Ford improves the profitability of its electric vehicle division, capitalizes on its strong hybrid and commercial vehicle segments, and manages costs effectively, the stock could rise in the coming months.

Should you buy or sell Ford shares?

The 15 Wall Street analysts covering the company agree that F stock is rated Moderate Buy. This rating is based on five buy recommendations, nine hold recommendations, and one sell recommendation issued over the past three months. The average price target of $13.67 on Ford stock suggests an upside potential of 24.39%.

If you are wondering which analyst to follow regarding Ford stock, the most profitable analyst (on a one-year time frame) is Michael Ward of Bank of America Securities (BAC) with an average return of 11.53% per rating and a success rate of 43%.

Read more analyst ratings on F shares

Diploma:

Ford's future depends on its ability to navigate a rapidly evolving auto industry. The company's leadership in hybrid and commercial vehicles provides a solid foundation, but its electric vehicle division faces challenges from competitors and rising costs. At the same time, there is potential for F stock to rise if the automaker can execute on its electrification strategy and control costs. While I believe investors should remain cautious, for those willing to take risks, Ford's long-term prospects could be attractive.

notice