There's one unfortunate reality facing Ford Motor Company's (F -0.40%) investors: Alan Mulally isn't walking back through the doors at the Blue Oval offices. Mulally, the automaker's CEO during the financial crisis, engineered the company's path forward without a government bailout. And his "One Ford" vision helped propel it to record profits in just a few years.
However, Ford has seemingly lost its way since Mulally retired roughly a decade ago. And with recent challenges, is it finally time to give up on the automaker?
A stock spinning its tires
When it comes to investments appreciating over time, Ford's stock has been spinning its tires. Consider that since Mulally retired, the company has shed roughly 36% of its value over roughly a decade.
Investors are quick to bring up Ford's robust dividend, which sits at a yield of 5.7%, as a reason to own the stock, and it certainly adds value. In fact, you can see over the long haul that its dividend represents the bulk of the value for investors.
As you can see, the returns with the dividend included far exceed just its stock price alone. However, the graph above leaves out one important detail: opportunity cost. When you consider what the S&P 500 has done over the same time period, investors can see that even the robust dividend isn't enough to keep pace.
A plague of a problem
Raise your hand if you've heard this before, Ford investors: Costs are weighing down profits. This narrative started over a year ago when management said it was billions in costs behind its closest competitors -- a huge red flag for an industry stalwart.
Not only are costs and operational efficiency continuing challenges, the automaker also has led the U.S. industry in recalls for three straight years, and it's having a substantial financial effect.
During the second quarter, it spent $2.3 billion on warranty and recall costs, up a significant $800 million compared to the first quarter and over $700 million more than the prior year. That's a big deal when second-quarter adjusted earnings before interest and taxes (EBIT) checked in at only $2.8 billion.
Warranty costs aren't the only problem at Ford, which is struggling to bring costs down on its electric vehicles (EVs). The automaker's model-e division lost nearly $3.7 billion in EBIT during the first nine months of 2024, which was just a few dollars behind the $3.703 billion in total EBIT that its traditional business, Ford Blue, generated over the same time frame.
Fundamental changes
Management also faces a fundamental problem, at least as things currently stand with battery costs. Traditionally, it has made a vast majority of its profits on incredibly profitable full-size trucks and SUVs. The dirty secret is that they cost only marginally more to produce than a sedan but can sell at two to three times the price.
That equation has powered the company to very profitable years, but that history could be changing as the world transitions to EVs. Larger vehicles that were traditionally more profitable now require much larger and much more expensive batteries, making its historic bread-and-butter products less lucrative.
Also, roughly a decade ago, China was hyped as the market that would become a second pillar of profits for Ford, standing alongside North America's lucrative business. The market was growing fast, it was already massive, and EV technology was ahead of the game.
Fast forward to today, and Ford is likely closer to exiting China entirely than it is to turning it into a valuable market. The company is getting clobbered by domestic brands that are years ahead in EV technology and pricing in a market where EVs accounted for 51% of total new vehicles sales as recently as July.
When you look at the automaker from top to bottom, you could come away with the impression that it's unorganized. For example, its dealer inventories are a mess, with roughly 112 days' worth of supply on lots at the end of September, which is much higher than the 81-day average for the U.S. industry. That's important because high inventories put pressure on pricing and production rates.
What it all means
Management faces significant challenges as the world transitions to a future that's EV-centric with driverless cars -- where instead of paying the high cost of ownership if you don't need a car that often, you can have access to one via a subscription (known as "vehicles as a service").
Ford consistently faces cost challenges and recall concerns, has failed to develop China into a valuable market, and is burning billions on EV development. On top of all that, it has uncertainty about the profitability of its most important products, and its robust dividend can't offset the difference in value returned between the stock and the broader S&P 500.
So for me, a longtime Ford investor, this is my 12-month notice that if there isn't substantial management progress with costs, recall expenses, and EV losses, I'm finally giving up on the automaker and moving my capital to an investment with more upside and less uncertainty. Alan Mulally isn't walking back through that door, and I've been slow to realize how much that matters.
