Like its corporate slogan, “Built Ford Tough,” investors must have enormous strength to withstand frustration and possess nerves of steel of own shares of Ford Motor Company (NYSE:F). Ford stock, which has fallen some 5% over the past year, has been stuck in neutral for quite a while, trailing not only the 17% one-year rise in the S&P 500 index, but also the 18% one-year gain in rival General Motors Company (NYSE:GM).
Investors want to know what can drive F stock, which closed Friday at $12.53, higher in the quarters and years ahead. Despite the 3% rise year-to-date, Ford stock is a screaming bargain, whether based on price-to-earnings or price-to-sales ratios.
Is F Stock in Trouble?
The reason for the underperformance in F stock? Aside from reduced prospects in U.S. auto sales, the auto industry, which is capital intensive, produces notoriously low profit margins. In the case of Ford, the Michigan-based automaker, which produced $151.8 billion in revenue for 2016, had to spend $147.6 billion for those sales, yielding just $4.5 billion in net income. In the last five years, Ford’s average profit margin has been 4.2%, according to YCharts. This compares to 6.69% for Toyota Motor Corp (ADR) (NYSE:TM) and 4.38% for GM.
Meanwhile, although Tesla Inc (NASDAQ:TSLA), which has a 5-year average profit margin of -57%, has yet to make money, TSLA stock has risen 608% in five years, while Ford stock has fallen 1.4% during that span. The difference between F stock and Tesla? The latter has stronger growth prospects. Depending on the extent the company can expand its profit margins, F stock should begin to drive higher. The company’s capabilities in the ride-sharing market is a key to that expansion.
Ford CEO Mark Fields has begun to focus on automotive technologies to drive growth into the 21st century. And these technical ventures, which include internet-enabled services such as shuttle vans that can be hailed using a smartphone app, put Ford in the realm of tech powers like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) subsidiary Google and Tesla.
These initiatives suggests F doesn’t want to be left behind. But as with its existing business, can Ford bankroll these projects in a way that drivers higher margins? To date, F has spent about $500 million in these initiatives, according to Reuters. By comparison, Toyota has spent more than $1 billion, while GM has spent $1.2 billion.
Bottom Line for Ford Stock
Fields is clearly treading cautiously with the company’s tech spending and has ventured too quickly and too far beyond its core business. While I think this is the right approach, he’ll soon need to show more commitment to these ideas to inspire more confidence in F stock. But with a quarterly dividend of 15 cents that yields 4.7% annually, investors have tons of incentive to be patient.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.