Key Points
Ford should remain a low-margin and low-growth business, which doesn’t bode well for investment returns.
The company hopes that its electric vehicle segment will be profitable in 2029, as it tightens its strategic focus.
Shares lagged the S&P 500 in the past 10 years, a trend that will probably continue.
Most investors are familiar with the Ford Motor Company(NYSE: F). It was founded all the way back in 1903, giving it a long history that has positioned it as a leader among mass-market carmakers. And its F-Series trucks have been the best-selling vehicles in the U.S. for 44 straight years, a streak that is still going.
This automotive stock, however, hasn't beaten the market, as it has generated a total return of 86% in the past decade (as of Feb. 24), compared to the S&P 500's more than 300% total return. Where will Ford be 10 years from now?
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What will stay the same?
Making predictions a decade into the future is hard. However, investors can focus on things that won't change.
With Ford, it's almost a certainty that in 2036, the company will still be a leader when it comes to gas-powered cars, even though volumes might decline as the industry becomes more sustainable. In the U.S., under 8% of auto sales volume last year came from electric vehicles (EVs). So, it might take some time for the mix of cars on the road to change meaningfully.
Ford's business model and financial attributes will also likely stay the same, which isn't a positive sign. Demand will remain cyclical, moving with interest rates and other macroeconomic forces. Its profit margins will remain very low. And growth won't be anything to write home about.
Evolving trends to pay attention to
Even though the auto industry can be characterized as being extremely mature, it doesn't mean nothing will change over the next decade. Even Ford is thinking ahead.
Electric vehicles (EVs) will probably represent a larger share of the overall market's sales in the future. But Ford was forced to tighten its strategy, as it took $19.5 billion in special charges last quarter to admit that demand was softer than anticipated. The company will focus on hybrid models and smaller, affordable EVs.
The business believes that by 2030, half of its global volume will come from non-gas-powered cars, up from 17% today. That's a massive transition. Ford Model e, the company's EV unit, is also expected to be profitable by 2029. It's hard to be optimistic, given the billions in operating losses it has reported historically.
By selling vehicles and related software and services to government and commercial clients, Ford Pro is a notable bright spot that sports a double-digit operating margin. Assuming this segment continues to drive growth and profits, it can help Ford's cyclical revenue mix become more recurring over time.
Will Ford outperform the S&P 500?
The fact that investors are thinking about Ford with a 10-year time horizon is encouraging. Investing with a long time horizon like this is the best way to approach things.
Unfortunately, there's no reason to believe Ford will break past trends and outperform the S&P 500(SNPINDEX: ^GSPC) over the next decade. That's true even with the stock trading at a cheap valuation.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
