Down 20% in 2024, Ford stock a buy on this dip?

Despite being a well-known American car manufacturer, I see (F -0.30%) it is a big disappointment for its investors. Over the past five years, stocks have produced a total return of just 30%. This gain is seriously short of the total return of almost 100%. S&P 500.

This year has brought more pain to shareholders as Ford is down 20% in 2024 (as of August 6). But maybe it’s time to take a risk in business.

You should buy this car stock on the dive?

Ford’s disappointing Q2

Investors should not ignore it Ford’s latest financial resultswhich were terribly disappointing. In fact, the stock took a huge hit immediately after the announcement.

The company missed Wall Street estimates by a wide margin, posting adjusted diluted earnings per share of $0.47 in the second quarter (ended June 30), compared with a consensus expectation of $0.68. This was down 35% year-on-year.

Significantly higher warranty costs due to major quality issues deserve some blame. Ford spent $800 million more on warranties and recalls in Q2 than in the first quarter of this year.

The company’s Model e segment, which houses its electric vehicle (EV) operations, continues to burn cash in spectacular fashion. While revenue grew 37% year-over-year, operating losses totaled more than $1.1 billion. Its Model division has now lost $2.5 billion over the past six months. It’s anyone’s guess when things will turn around.

The notable bright spot was Ford’s pro segment. The commerce-focused entity grew sales by 9%. He also posted an impressive operating margin of 15.1%, much higher than the legacy Ford Blue division.

Cheap for a reason

Based on the stock’s huge success, it’s clear that the market is becoming very pessimistic about Ford’s prospects. That the stock is trading at a forward price-to-earnings ratio of just 5.2 is telling. This is its lowest valuation since at least early 2022 and is a massive 80% discount to the S&P 500 multiple.

Consequently, at the time of writing, Ford pays a consistent dividend yield of 6.2%. Perhaps investors looking for income will appreciate this.

However, I think the Ford looks like a classic value trap. It’s cheap for a reason. Historically, shareholders have not been rewarded with strong returns from owning these stocks. I don’t think that will change anytime soon.

One reason not to buy the stock is because of the company’s poor growth prospects. Revenue of $47.8 billion in Q2 was just 28% higher than the same period 10 years ago. The auto industry is very mature, which does not provide Ford with a robust background to increase its unit volume.

In addition to low growth potential, the industry is highly competitive. People make their buying decisions based on features, prices, safety, fuel economy and maintenance, for example. Ford doesn’t particularly excel in any of these areas. Making matters worse, there are many other global automakers trying to do the same. So I don’t think Ford owns one economic moatand this is a clear indication that it is not a high-quality enterprise.

Weak profitability trends are another reason to avoid Ford. Over the past five years, the company’s operating margin has averaged 1.3%. There is also no sign of economies of scale inherent in the business model.

Finally, Ford’s financial success is too sensitive to factors beyond its control. There are industry-specific variables such as supply chains. There are also macro factors such as interest rates. This makes the business incredibly cyclical.

Ford shares have fallen over the past two weeks. That doesn’t mean you should buy the stock on the dip.