There is no shortage of reasons to be bearish about this business.
While the stock market generally goes up over time — due mainly to rising sales and earnings of businesses — there are some companies that are best kept out of one’s portfolio. That’s particularly true if one is trying to outperform the broader indexes over the long term.
There’s one business whose shares have done relatively well recently, up 18% in just the past six months. But this auto stock has been a disappointment over much longer periods of time.
Continue reading to find out which company I wouldn’t touch with a 10-foot pole. Perhaps you’ll feel the same way, too.
Focus on the big picture
To its credit, Ford (F -1.15%) reported decent financial results in the three-month period that ended March 31. Revenue was up 3% year over year to $42.8 billion. And while diluted earnings per share dropped 25%, the figure still came in well ahead of Wall Street estimates.
In a vacuum, those numbers might be fine. But if we zoom out, there’s not a lot to like about this business.
One key reason to avoid the stock is because Ford operates in the auto industry, which is extremely mature, with limited growth prospects. According to the International Energy Agency, the number of passenger vehicles sold in 2022 was 74.8 million, just 12% higher than it was in 2010. That doesn’t create a favorable environment to boost sales in any meaningful way. In fact, Ford’s revenue rose at only a 1.8% annualized rate between 2013 and 2023.
The rise of electric vehicles (EV) has spurred increased investment from carmakers of all sizes to bring about a more sustainable future. But demand for these has been weaker than expected, and they aren’t going to make people want to buy new vehicles more frequently. Moreover, Ford continues to post billions in operating losses in its EV division each quarter as it attempts to scale up.
Another reason I wouldn’t touch Ford with a 10-foot pole is because of just how competitive the industry is. The company doesn’t have sustainable competitive advantages. There are lots of large automakers with a strong presence in markets across the world, all competing on price and quality, all spending tons on marketing, and all trying to attract affordable labor.
This means that Ford will continue to struggle to produce outsize investment returns. In the past 10 years, the stock has generated a total return of 31% (including dividends). That seriously lags the S&P 500. There’s no reason to believe this trend will change.
Warren Buffett’s thinking
Berkshire Hathaway just had its annual shareholder meeting, with investors once again eager to hear Warren Buffett’s wisdom. I think it’s appropriate to consider what the Oracle of Omaha said at the 2015 meeting — words that apply to Ford.
“Any business with heavy capital investment tends to be a poor business to be in in inflation and often it’s a poor business to be in generally,” he said.
Ford is an extremely capital-intensive enterprise. It must always invest heavily in factories, research and development, and marketing — things that are table stakes just to maintain its industry position. But based on the company’s historical performance, whether we are in an above-average inflation situation or not, Ford really struggles to report financial results that are anything to write home about.
One could point out that these financial disadvantages don’t matter in stronger economic periods, so it might just be smart to scoop up the stock right before the economy turns from a downturn to growth mode. However, no one can accurately predict the timing of the economic cycle. And this highlights the fact that Ford is a very cyclical company — yet another reason I wouldn’t touch the stock with a 10-foot pole.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
