Over the past six months, Ford’s stock price fell to $9.31. Shareholders have lost 15.7% of their capital, which is disappointing considering the S&P 500 has climbed by 5.1%. This might have investors contemplating their next move.
Is there a buying opportunity in Ford, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Despite the more favorable entry price, we don't have much confidence in Ford. Here are three reasons why we avoid F and a stock we'd rather own.
Why Do We Think Ford Will Underperform?
Established to make automobiles accessible to a broader segment of the population, Ford (NYSE:F) designs, manufactures, and sells a variety of automobiles, trucks, and electric vehicles.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Automobile Manufacturing company because there’s a ceiling to what customers will pay.
Ford’s vehicles sold came in at 1.19 million in the latest quarter, and over the last two years, averaged 2.9% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Ford’s margin dropped by 10.9 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business. Ford’s free cash flow margin for the trailing 12 months was 3.6%.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Ford’s $158.5 billion of debt exceeds the $38.35 billion of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $16.08 billion over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Ford could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Ford can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Ford falls short of our quality standards. After the recent drawdown, the stock trades at 5.6× forward price-to-earnings (or $9.31 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d suggest looking at our favorite semiconductor picks and shovels play.
Stocks We Would Buy Instead of Ford
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