Ford Motor Company‘s (NYSE: F) shares have been in the fast lane. Over the past 12 months, they have climbed 21% (as of Sept. 3). Surprisingly, this performance is ahead of four of the “Magnificent Seven” stocks, high-powered companies sitting in the middle of impactful technological trends. Investors aren’t used to this automotive stock putting up…
Ford Motor Company‘s (NYSE: F) shares have been in the fast lane. Over the past 12 months, they have climbed 21% (as of Sept. 3). Surprisingly, this performance is ahead of four of the “Magnificent Seven” stocks, high-powered companies sitting in the middle of impactful technological trends.
Investors aren’t used to this automotive stock putting up strong returns. In the past five years, Ford’s share price increased by just 9%. But can the business do a better job at rewarding its investors over the coming half-decade?
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Here’s where I believe Ford stock will be in five years.
Image source: The Motley Fool.
Things will stay the same
At a high level, Ford’s operations aren’t going to change much going forward. Known for its pickup trucks and SUVs, the company will remain a leading player in this segment of the automotive industry. Its Ford Blue segment will remain the most important financial driver. This division reported revenue of $26.1 billion in the second quarter, representing 54% of the company’s total.
There’s also the Ford Pro segment, which sells vehicles, software, and services to commercial and government clients. It’s more profitable than traditional car sales and offers greater growth potential. Perhaps most importantly, it brings in a recurring revenue stream from subscriptions.
The company’s bulls will point to the recent announcement of the Ford energy segment. This division plans to sell battery storage systems to commercial and industrial customers. Given the substantial demand for these solutions, driven by the data center boom, the business is positioning itself at the center of a notable growth trend.
The good news is that this move leverages assets from the restructured electric vehicle (EV) operations. In December last year, Ford announced a significant $19.5 billion special charge to pull back its EV investments due to softer-than-expected demand. It’s now hoping to monetize these capabilities with the energy segment.
The bad news is that Ford energy, no matter how much excitement it adds to the Ford story, isn’t likely to move the financial needle much. According to Morgan Stanley, Ford Energy is projected to bring in $550 million (at the midpoint) in operating income once it reaches full scale. This represents a trivial 5% of the $10.5 billion in adjusted operating income that the overall business is expected to report in 2026.
Ford isn’t set up to post market-beating returns
Ford’s operations aren’t going to change. Therefore, investors shouldn’t expect the business to suddenly become a market-beating investment opportunity. The company isn’t set up to produce outsize returns.
First off, the mass-market auto industry isn’t supportive of strong growth. In the U.S., the same number of passenger cars were sold in the month of July compared to 40 years ago, making it a very mature market.
Ford’s demand can also be highly cyclical. New cars are typically the second-largest purchase consumers make in their lives. When the economy is down, people will delay buying a vehicle. Ford’s already razor-thin profit margins add financial risk when macro forces shift.
And the capital expenditures are meaningful. Ford must continually invest additional resources in the business just to maintain its position in the industry. The reward for this is minimal growth.
Investors can find the best opportunities in the compounding machines. These companies can consistently grow their revenues and profits at healthy rates over the long term. They possess durable competitive strengths. And they don’t experience much cyclicality.
Ford will never be in this category. In five years, I think the best-case scenario is that the stock appreciates by 50%, which is admittedly a low-probability outcome. Because shares trade at a forward price-to-earnings ratio of just 7.4, upside can come from multiple expansion. Of course, improving market sentiment is not a sure thing.
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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.
Where Will Ford Be in 5 Years? was originally published by The Motley Fool
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