Is it finally time to give up on Ford?

There is one unfortunate reality we face Ford Motor Company‘S (NYSE:F) investors: Alan Mulally is not walking back through the doors of the Blue Oval offices. Mulally, the automaker’s CEO during the financial crisis, has charted the company’s path forward without a government bailout. And his “One Ford” vision helped the company achieve record profits in just a few years.

However, Ford has seemingly lost its way since Mulally retired about a decade ago. And given the recent challenges, is it finally time to give up on the automaker?

A stock that spins its tires

When it comes to investments that increase in value over time, Ford stock is on a roll. Consider that since Mulally retired, the company has lost about 36% of its value in about a decade.

Investors are quick to cite Ford’s robust dividend, which has a 5.7% yield, as a reason to own the stock, and it certainly adds value. In fact, over the long term, you can see that the dividend represents the majority of the value for investors.

F data Ygraphs.

As you can see, the returns, including the dividend, far exceed the share price alone. However, the chart above leaves out one important detail: opportunity cost. If you think about what the S&P500 has done over the same period, investors may see that even the robust dividend isn’t enough to keep pace.

F data Ygraphs.

A plague of a problem

Raise your hands if you’ve heard this before, Ford investors: costs outweigh profits. This story started over a year ago when management said costs were billions behind its closest competitors – a huge red flag for a tough industry.

Not only do costs and operational efficiency remain challenges, the automaker has led the U.S. industry in recalls for three years in a row, with significant financial implications.

During the second quarter, the company spent $2.3 billion on warranty and recall costs, a significant increase of $800 million compared to the first quarter and more than $700 million more than the previous year. That’s a big problem when adjusted earnings before interest and taxes (EBIT) for the second quarter were just $2.8 billion.

Warranty costs aren’t the only problem at Ford, which is struggling to bring down costs for its electric vehicles (EVs). The automaker’s Model-E division lost nearly $3.7 billion in EBIT through the first nine months of 2024, which was just a few dollars less than the $3.703 billion in total EBIT that its legacy business, Ford Blue, posted in generated during the same period.

Fundamental changes

Management also faces a fundamental problem, at least as things currently stand with battery costs. Traditionally, the company has made the vast majority of its profits from incredibly profitable large trucks and SUVs. The dirty secret is that they are only marginally more expensive to produce than a sedan, but they can be sold for two to three times as much.

That equation has led the company to very profitable years, but that history could change as the world transitions to electric vehicles. Larger vehicles that were traditionally more profitable now require much larger and much more expensive batteries, making the historic bread-and-butter products less lucrative.

Furthermore, China was hyped about a decade ago as the market that would become a second profit pillar for Ford, alongside North America’s lucrative operations. The market was growing rapidly, was already huge and EV technology was at the forefront.

Fast forward to today, and Ford is probably closer to exiting China completely than to turning China into a valuable market. The company is being beaten by domestic brands that have been at the forefront of EV technology and pricing for years in a market where EVs accounted for 51% of total new vehicle sales in July.

If you look at the car manufacturer from top to bottom, you might get the impression that it is disorganized. For example, dealer inventories are in a mess, with about 112 days of supply on lots at the end of September, which is much higher than the 81-day average for the U.S. industry. This is important because high inventories put pressure on prices and production rates.

What it all means

Management faces major challenges as the world transitions to an EV-centric future with self-driving cars – where, instead of paying the high cost of ownership if you don’t need a car as often, you can access it through a subscription (known as “vehicles as a service”).

Ford continues to face cost challenges and recall issues, has failed to develop China into a valuable market and is spending billions on developing electric vehicles. Additionally, there is uncertainty about the profitability of its key products, and the robust dividend cannot offset the difference in value between the stock and the broader S&P 500.

So for me, a long-time Ford investor, this is my 12-month notice that if there is no substantial management progress on costs, recall costs and EV losses, I will ultimately give up on the automaker and move my capital to another company. investment more upside potential and less uncertainty. Alan Mulally doesn’t walk back through that door, and I’m only slowly realizing how much that matters.

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Daniel Molenaar holds positions in Ford Motor Company. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has one disclosure policy.