To say that Ford Motor Company (NYSE:F) It wasn’t a worthwhile investment, that would be putting it lightly. Even taking dividends into account, this automaker’s total return has lagged its total return S&P 500 in the last three, five and ten years.
But this Car inventory has had periods of strong performance. Shares rose 136% in 2021 as they were on the recovery path after the pandemic’s rapid onset. After this monumental win, Ford’s Market capitalization briefly exceeded the $100 billion mark in early 2022.
Since then, developments have been disappointing, as the valuation has practically halved and now stands at $50 billion (as of May 2). Ford’s bulls must be wondering whether the company can ever reach the $100 billion mark again.
Pressing the accelerator pedal
Ford’s market cap has never been higher than it was in January 2022. Investors were clearly extremely excited about the trajectory the company was on at that point. It makes sense why.
In 2021, Ford reported revenue of $136 billion, up 7% from the previous year. While unit volumes declined, sales growth was driven by favorable mix and pricing. At that time, the global economy was dealing with supply chain issues.
These financial results were spectacularly better than the numbers in 2020. This year, Ford reported an 18% decline in sales as the pandemic forced factory and dealer closures. Due to the decline in sales, the company also posted a huge operating loss of $4.4 billion.
Just before the company started achieving better results, expectations were low. This created the perfect conditions for investors to achieve monster returns. It’s no surprise that Ford Price-earnings ratio The price-to-earnings (P/E) ratio rose significantly as sentiment quickly shifted from bearish to optimistic due to improving fundamentals.
What has to happen
Ford is in a much better position today than it was a few years ago as the industry stabilizes. Sales rose 18% last year before rising slightly in the first quarter. The leadership team expects adjusted free cash flow this year (at the midpoint) to be $7 billion, above previous guidance. Shares are up 26% in the last six months.
But for the company to get back to a $100 billion market cap, a lot of positive developments need to take place. First, Ford needs to start showing consistent sales growth across all of its segments. The commercial division is now destroying them, while the blue segment (gas vehicles) and the e-segment (electric vehicles) have just seen volume declines. Ford will also likely need to gain market share in the industry.
There is no doubt that profits must continue to increase. The challenge is that the automotive industry is so capital intensive, low margin and cyclical that it makes it extremely difficult for Ford. The operating result fell significantly in 2023.
The EV segment also reduces the results of the overall company. Ford posted an operating loss of $4.7 billion in this division last year. I think that for the company to reach a $100 billion valuation, investors will want to see significant improvements here.
And of course, if fundamentals improve over time, it’s easy to believe Ford The valuation may start to rise. The stock is currently trading at a P/E ratio of 12.8. It probably won’t get as high as it did at the end of 2021, when it was close to 30, but there could be some expansion.
I don’t necessarily think this outcome is impossible. Ford’s market cap has grown 84% over the past two decades. If this track record continues, perhaps over the next 30 years, a $100 billion valuation is within the realm of possibility.
But this shows how long it could take to reach that milestone again. In my opinion, investors looking for higher yielding stocks should look elsewhere.
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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Can Ford become a $100 billion company again? was originally published by The Motley Fool