Ford (F) investors are likely to be an unhappy group. Not only is the stock underperforming the markets, but it's down over 10% YTD - even as the S&P 500 Index ($SPX) has risen to record highs, and crossed above 6,000 for the first time ever after Donald Trump’s election. What adds salt to the wound is that rival Detroit automaker General Motors (GM) has gained over 54% so far in 2024.
Towards the end of 2021, Ford’s market cap surpassed GM's, and in early 2022, Ford's market cap surpassed $100 billion for the first time. Cut to 2024, and Ford’s market cap is about $44 billion while GM commands a market cap of over $60 billion. Put simply, Ford’s woes seem to be more of a company-specific issue, rather than a reflection of the market’s long-held pessimism towards legacy automakers. In this article, we’ll discuss what’s been driving this divergence between Ford and GM, and whether things could change in 2025.
Why is Ford Stock Underperforming GM?
One of the reasons Ford’s market cap surpassed GM in late 2021 was the optimism over the company’s turnaround under CEO Jim Farley, and the Blue Oval's aggressive pivot towards electric vehicles (EVs). However, Ford has faltered on both fronts, with pre-tax losses in the EV segment expected to widen to around $5 billion this year. It has scaled back its ambitious EV plans, and even the sales of F-150 electric – whose internal combustion engine (ICE) has been the best-selling pickup in North America for decades - have sagged.
Notably, after a slow start, sales of Tesla’s (TSLA) Cybertruck are now outpacing those of the F-150 Lightning. Moreover, GM is now the second-largest EV seller in the US - a position that once rested with Ford.
GM is optimistic about achieving a variable profit in the EV business in Q4, and expects the segment's operating losses to fall by between $2 billion and $4 billion in 2025. GM’s EV strategy has fared better as compared to Ford, which is one of the reasons the stock has outperformed. Even in the ICE business, Ford continues to struggle against warranty and repair costs, which it has termed as a “legacy issue.” However, this year alone, the company recalled thousands of F-150 and Maverick pickups. What's troubling is that these are recent models (2022-2024), so they can't be brushed aside as legacy issues.
The divergence between the two companies was on full display during the Q3 earnings calls, where GM raised its guidance for the third consecutive quarter, while Ford guided for the low end of its previous guidance.
GM’s Buybacks Are Also Helping It Outperform F Stock
Meanwhile, I believe the capital allocation policies of the two companies are also driving the divergence in their price action. Last year, GM announced a massive $10 billion share buyback, and authorized yet another $6 billion repurchase in June. During the Q3 earnings call, GM said that it has retired almost a fifth of its outstanding shares, and plans to lower its outstanding share count to 1 billion by early next year.
Ford, on the other hand, has been a dividend powerhouse. On top of its attractive dividend yield, it has paid special dividends for two consecutive years, and could very well announce yet another special dividend next year.
Markets, however, seem to prefer GM’s aggressive buybacks over Ford’s generous dividends, and the divergence in the price action of the two stocks gained traction following GM’s 2023 buyback announcement.
Can Ford Outperform GM in 2025?
In terms of valuation, Ford’s forward price-to-earnings (PE) multiple of 5.8x is above the 5.2x that GM trades at, as both legacy automakers continue to hover around dismal single-digit PE multiples.
For Ford to outperform GM next year, the company has to do a lot of things right. First, Ford has to structurally address the warranty and repair issues that keep popping up every few quarters. These not only negatively impact its earnings, but do damage to the brand, as well as how investors perceive the company.
Second, Ford will need to show meaningful progress in cutting down its EV losses next year, while continuing to grow its deliveries. That’s easier said than done, though, as the EV industry remains plagued by massive overcapacity, which is driving the price war.
Finally, a tweak in capital allocation could also help, and Ford should consider increasing the pace of buybacks instead of doling out the special dividend. However, looking at the tone of the recent earnings calls, Ford does not seem to be inclined toward aggressive buybacks.
For instance, during the Q3 earnings call, while CFO John Lawler said that the company’s cash pile of $28 billion is $8 billion higher than the minimum cash it intends to hold, he practically ruled out a mega buyback: “At this point in time, where we're at in the industry, where we're at in the overall economic cycle, the uncertainty around the globe, right now, it's the right thing to hang on to cash,” said Lawler.
And during the Q2 earnings call, in response to an analyst question about Ford not doing a big buyback despite its low valuations, Farley said that Ford has “so many exciting businesses to invest in” - specifically citing its Pro commercial business.
Another unstated reason behind Ford not doing a big repurchase is the “family element,” as the Ford family still owns a big chunk of voting powers through Class B shares. The family does not intend to sell its holdings, and might prefer a dividend over a buyback - and that’s precisely what's been happening at Ford.
All of that said, Ford’s underperformance is getting frustrating for investors - including me, as the near 6% dividend yield does not mask the capital erosion that the stock has experienced over the last few years. The ball now lies in Ford management's court, which has to deliver on several fronts for the stock to play catchup with GM.
On the date of publication, Mohit Oberoi had a position in: F , GM , TSLA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
