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Despite being a listed company for nearly seven decades, Ford (F) stock is barely in double digits. In this article, we’ll discuss why Ford's stock is trading so low, and whether Tesla (TSLA) is to blame for the company’s woes.
To begin with, let’s look at the difference between a low stock price and a cheap stock, as the nuanced differences between these two categories can often be confusing. When we talk about a “low stock price,” it's in reference to the absolute share price, and not a measure of valuation. For instance, Ford’s stock price is low on an absolute basis - compared not only to Tesla but also to its Detroit rival General Motors (GM).
Ford's Stock Price is Low, as Well as Cheap
A stock’s “cheapness,” on the other hand, refers to its valuation. So, a cheap stock would have relatively low valuation multiples, such as the price/earnings (P/E) ratio, enterprise value (EV)/sales, and other such metrics.
For instance, Ford’s next 12-month (NTM) PE multiple is just 5.4x, which makes it among the cheapest S&P 500 Index ($SPX) constituents, based on that metric. GM scores even worse, with its NTM PE multiple just under 5x. For context, the S&P 500 Index’s NTM PE stands at around 21.4x, which is higher than its historical averages, while Tesla trades at over 88x.
Why is Ford Stock So Low?
Stock splits can lower a company's share price in absolute terms, and management will implement these to make their shares more “affordable” for retail investors. However, since Ford’s last split happened 3 decades ago, that's not the cause for its low stock price.
The second reason the stock price of any company might be depressed is because of the poor performance of its shares – which happens to be the case for Ford, as its shares trade at less than one-third of the all-time highs they hit in 1999. Ford's average annual returns since its IPO have been in the low single digits, and while the stock has a healthy dividend yield it has failed to beat markets since its IPO – which was the biggest in the U.S. at the time.
Ford Stock is Cheap for a Reason
Along with its low share price, Ford stock is quite cheap based on nearly all metrics, including cash flows. The Detroit automaker expects to generate adjusted free cash flows between $7.5 billion and $8.5 billion in 2024, which looks quite healthy considering its market cap is just about $42 billion. These cash flows not only adequately cover the company’s current dividend, but also leave space for a supplemental dividend early next year – something Ford has done for two years now.
However, Ford stock is so cheap for a reason. First, it has been struggling for growth, and its 2022 revenues were lower than in 2000.
While Ford's pivot to electric vehicles (EVs) was expected to drive top-line growth, so far it has only been a drain on the bottom line, with the company forecasting a pre-tax loss of between $5 billion-$5.5 billion for its Model e segment that produces electric cars. If anything, the losses have been widening as the business lost $4.7 billion on a pre-tax basis last year.
While some of the blame could be put on Tesla, whose relentless price cuts worked to the detriment of the EV industry, in a competitive and free market the Elon Musk-run company was within its rights to adjust the pricing that it thought worked best.
Automakers Have Lowered Profit Forecasts
Ford’s woes are not limited to the EV price war that Tesla initiated and exacerbated, and the company faces several other challenges - both on the macro as well as company-specific levels.
Automakers are struggling with tepid demand and rising costs, and Volkswagen (VWAGY), Aston Martin (AMGDF), and Stellantis (STLA) have all lowered their 2024 outlooks over the last month. In Volkswagen’s case, it was the second profit warning in three months, as the global auto giant faces a worsening environment in the domestic European market as well as China, where foreign automakers have been struggling for years now.
Ford and GM Are Posting Record Profits
That said, things look somewhat different for Ford and General Motors, and GM recently raised its 2024 adjusted pre-tax profit guidance by $500 million at both the lower and upper end. GM also allayed fears over profits cratering next year, and at the investor day earlier this month said that 2025 adjusted earnings will be “similar” to this year – without providing a hard number. While Ford will only update its guidance when it releases its Q3 earnings, CEO Jim Farley has been stressing that the company is nowhere near peak profitability, contrary to what many believe.
That said, despite Farley’s transformation efforts, Ford continues to battle legacy issues related to recalls and warranty costs. Recently, it recalled thousands of F-150 and Maverick pickups. What was troubling is that these are recent models (2022-2024), so they can't be brushed aside as “legacy” issues.
Legacy issues related to warranty costs, fears of peak profits in the internal combustion engine (ICE) business, and no clear timeline of EV profitability are the three key reasons Ford trades at such depressed valuations. While there is no easy fix for these troubles, I find Ford stock an attractive buy, especially for its fat dividend yield and cheap valuations that seem to factor in all of the negatives.
On the date of publication, Mohit Oberoi had a position in: F , GM , TSLA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
