Despite being a well-known American car maker, Ford (NYSE: F) is a huge disappointment for its investors. In the past five years, shares have produced a total return of just 30%. This gain seriously lags the almost 100% total return of the S&P 500.
This year has brought shareholders more pain, as Ford is down 20% in 2024 (as of Aug. 6). But maybe it's time to take a chance on the business.
Should you buy this auto stock on the dip?
Ford's disappointing Q2
Investors shouldn't ignore Ford's latest financial results, which were awfully disappointing. In fact, shares took a huge hit immediately following the announcement.
The business 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 to a $0.68 consensus expectation. That was down 35% year over 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 this year.
The company's Model e segment, which houses its electric vehicle (EV) operations, continues burning money in spectacular fashion. While revenue soared 37% year over year, the operating loss totaled more than $1.1 billion. The Model e division has now lost a gut-wrenching $2.5 billion in the past six months. It's anyone's guess when things will turn around.
The notable bright spot was Ford's pro segment. The commercial-focused entity grew sales by 9%. It 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 hit, it's obvious that the market is becoming very pessimistic about Ford's prospects. The fact that the stock trades at a forward price-to-earnings ratio of just 5.2 is telling. This is its lowest valuation since at least the start of 2022, and it's a massive 80% discount to the S&P 500's multiple.
Consequently, as of this writing, Ford pays out a hefty dividend yield of 6.2%. Perhaps income-seeking investors will appreciate this.
However, I believe Ford looks like a classic value trap. It's cheap for a reason. Historically, shareholders haven't been rewarded with strong returns from owning this stock. I don't think this is going to change anytime soon.
One reason not to buy shares is because of the company's low growth prospects. Revenue of $47.8 billion in Q2 was only 28% higher than in the same period 10 years ago. The auto industry is very mature, which