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The nature of the auto industry doesn’t support rapid growth or huge profit margins.
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If a recession happens in the near future, Ford’s sales will probably be under pressure.
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Investors interested in strong dividend income will find the stock interesting.
Ford (NYSE: F) likely needs no introduction among the investment community. It’s a storied company that has been a major part of the U.S. economy for quite some time, known for its popular trucks and SUVs. Even today, as the industry slowly shifts to a more sustainable future, Ford is aiming to remain relevant in a sea of competition.
In the past 30 years, this automotive stock has produced a total return of 228% (as of April 28). Here’s what investors should know about this Detroit car manufacturer if they’re considering adding the business to their portfolios.
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The auto market is a far cry from the capital-light and scalable nature of other industries like digital advertising, cloud computing, or payments, for example. Producing mass-market vehicles is incredibly capital-intensive. Raw materials, labor, factories, and machinery are all expensive aspects of the business. Ford can’t escape this reality.
Investors can’t expect the business to register strong growth. The industry is extremely mature. General population and GDP growth might be the two biggest drivers of revenue and car volume in the long run. That doesn’t give investors much to be excited about. Ford’s 2024 sales of $185 billion were just 28% higher than a decade before.
Profitability is disappointing as well, as you can imagine. In the past 10 years, Ford’s operating margin has averaged just 2.4%. And there is no sign of economies of scale, where revenue grows at a faster rate than expenses, thanks to operating leverage. Ford might have limited negotiating leverage with suppliers and with labor, the latter influenced by unionization efforts.
The industry makes it difficult for companies to find consistent success. Even those that stand out for their disruptive and innovative capabilities, like Tesla, aren’t immune to the external forces that can negatively impact growth and profitability.
That previously mentioned low operating margin does not provide the company with much of a financial cushion should the economy take a bad turn and sales figures come under pressure. And this could happen. That’s because demand for new vehicles can experience cyclicality. Consumers will decide to hold off buying a new car if they lose confidence in the direction the economy is heading. A potential recession could lead to revenue declines that push Ford to report net losses.
