Ford Motor Company Stock: Buy, Sell, or Hold?

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For a while, Ford Motor Company (NYSE: F) was a popular stock among Foolish investors. Now-retired CEO Alan Mulally had restructured the storied automaker without government help, putting it on a path to steady, profitable growth.

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Ford stock wasn't always so popular: Way back in early 2009, when all of Detroit appeared doomed, I asked readers to talk me out of buying Ford shares. You didn't, and I'm glad. I was also glad that quite a few Fools jumped in around the same time. We had a very profitable ride.

But since those highs, and despite good profits over the last couple of years, Ford has slowly fallen out of favor with investors. 

Now, with Ford shares trading at less than seven times the company's expected 2017 earnings, it seems like a good time to ask: Is Ford stock a buy, a sell, or a hold?

Let's take a closer look.

Bear case

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There are two common bearish narratives for Ford stock: that Ford is at risk of disruption from new high-tech market entrants and new business models, and that the all-important U.S. new-vehicle market appears to be past its cyclical peak, putting Ford's margins at risk.

Disruption risk 

Investors' ongoing fascination with Tesla's (NASDAQ: TSLA) dramatic growth story has seemingly cast a shadow over Ford (and other big automakers). At the extreme, the bullish investment case for Tesla stock assumes that it will become the largest and most profitable company in the history of humanity. How could Ford stock compete with that?

There are genuine concerns beyond the Tesla hype. Quite a few analysts think the world is moving toward "transportation as  a service," in which many of us will choose to give up car ownership in favor of mobility services using self-driving electric taxis. If so, given that the technology that will enable such services is probably only a few years away, where will Ford find profit growth -- if it even survives?

A related concern that's less bearish but still bearish: Even assuming that Ford can retool its business and product line to thrive in such a world, how much will it have to spend over the next few years to get there? 

Market cycle risk 

There's no question that this one is for real. The U.S. new-car market is clearly softening. As it softens further, increasing pricing pressure and declining sales will eat into Ford's profit margins. 

Given that Ford generated 61% of its revenue in North America last year, with a 9.7% operating margin in the region, you can see the concern. As that gets squeezed, so will Ford's bottom line. 

Bull case

Despite the bearish concerns, Ford stock has some big things going for it as an investment, even now.

Market trends 

The market may be sluggish, and possibly even headed for a decline before too long. But there's good news, too, in that consumer trends in the U.S., Europe, and China all favor Ford's most profitable products: trucks, commercial vehicles, and SUVs. That means Ford's profits are still strong: Ford earned $10.4 billion before taxes in 2016, and expects to earn close to $9 billion on that basis in 2017, despite the slipping market, higher commodity costs, and increased investments in future technologies.

Preparation for the next downturn

Ford isn't flinching from the possibility of a slowdown in new-vehicle sales. Unlike some rivals, notably General Motors (NYSE: GM), Ford's U.S. inventories are in great shape, meaning that it won't have to discount deeply to clear out unwanted vehicles. Ford has shown repeatedly that it can quickly adjust its production to meet demand as it falls (or rises, for that matter). 

It's also important to note that Ford has a hefty $28.4 billion cash reserve to sustain new-product development even if its profits disappear during a downturn. That was a key factor in Ford's success in the first couple of years after the last recession: It had fresh products available while its rivals were still scrambling to recover.  

Technology

While the disruption concerns are real at an industrywide level, Ford's doing just fine with the future tech: It has a strong self-driving research and development program, a big commitment to electric drivetrains, and a subsidiary that is putting together a series of compelling mobility-related offerings for cities. Ford also sees ways to leverage its decades of commercial-fleet expertise in the new mobility-enabled world, as a provider of fleet management services to operators of automated ride-haling and car-sharing fleets. (That has the potential to be a very lucrative business.)

There's no doubt that some automakers will be left behind as technology changes the way we get around, but Ford is better prepared than most.

Strong management team

Ford's board has shown that it isn't afraid to shake things up to keep the company on course. Ford has a new CEO, Jim Hackett, who has experience in tech-savvy corporate transformations (and who led Ford's mobility subsidiary before taking the top job.) Hackett has said that his mission is to sharpen Ford's execution, speed decision-making, and ensure that Ford can thrive in that future world of tech-enabled mobility. He has a good team behind him: Most of Ford's senior executives are veterans of the turnaround who have proven themselves in the years since. 

A sustainable 5.5% dividend yield 

The low valuation of Ford stock means that its dividend is yielding a fat 5.5% at the moment. And that dividend is sustainable, thanks to that hefty cash reserve. Ford expects to keep paying the dividend to shareholders through a downturn, at least as long as its cash reserve holds out. (Ford has a substantial credit line to draw on if it runs out of cash, but that credit line won't be used to fund the dividend.) 

Summing up

To sum up, there are real, substantial arguments both for and against an investment in Ford's stock now. An investor who buys here can reinvest that hefty dividend to dollar-cost average through any downturn, getting paid to be patient while Hackett and his team, backed by a strong balance sheet, work to complete the transformation of Ford and its businesses. 

But as we've seen, an investment in Ford stock isn't without risk. The market for new cars (and trucks, a super-important Ford profit center today) could transform and even shrink substantially over the next 10 to 15 years. And Ford's profits aren't likely to be growing in the near term: They'll almost certainly be down year over year in 2017, and Ford's bottom line will shrink further if (or rather, when) the U.S., Europe, or China enters a recession. 

Long story short: If you're attracted to the dividend and think Ford will prosper as the world changes, Ford stock could be a buy. But investors should tread carefully, as the risks are real. 

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John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford and Tesla. The Motley Fool has a disclosure policy.