Motley Fool: An underestimated automaker

Ford Motor Co. (NYSE: F) is a misunderstood business. Investors appear to be simultaneously undervaluing its highly profitable gasoline-powered businesses and dismissing its tantalizing potential in electric vehicles, or EVs.

Ford’s traditional auto business, Ford Blue, generated $25.1 billion in revenue and $2.6 billion in earnings before interest and taxes, known as EBIT, in the first quarter alone. Its commercial fleet operation, Ford Pro, is also a cash generator, producing EBIT of $1.4 billion on revenue of $13.2 billion. The profitability of both businesses could continue to strengthen thanks to cost-reduction initiatives at Ford Blue and a greater focus on software offerings at Ford Pro.

Meanwhile, Ford is gearing up to aggressively scale its electric vehicle operations. The auto titan is targeting 600,000 EV sales per year by the end of 2023 and 2 million by the end of 2026, up from fewer than 62,000 in 2022. These efforts won’t come cheap, and Ford expects to lose about $3 billion on EVs in 2023. But management is laser-focused on slashing its costs – and the price of EVs.

Ford also reached an agreement with Tesla to give its customers access to over 12,000 Tesla Superchargers in the U.S. and Canada. Ford believes its Model E division can achieve an EBIT profit margin of approximately 8% by the end of 2026. If it can do so, EVs will go from a source of losses to a powerful profit driver in the coming years.

Ask the Fool

Q. I’ve only been investing for a few years, and my average annual return is 18%. I don’t think that’s going to last. What kind of average gain should I expect over, say, a decade? – G.C., Keene, New Hampshire

A. That’s very hard to predict. If you invest primarily in index funds that track the broad market, such as an S&P 500 index fund, you can expect to earn roughly the same return as the index, less any fees. (The best index funds have miniscule fees.) Over many decades, the S&P 500 has averaged annual gains of close to 10%, but over your particular investment period, the average might be higher or lower.

You might outperform the stock market’s average handily if you invest in some individual stocks or mutual funds that perform very well – but that’s far from guaranteed and, arguably, unlikely.

The vast majority of actively managed stock funds, for example, underperform their benchmark indexes. And plenty of blue-chip stocks – such as Boeing, ExxonMobil, Procter & Gamble and Walmart – have underperformed the S&P 500 over the past decade. Superinvestor Warren Buffett recommends that most people invest via low-cost, broad-market index funds.

Q. Do any index funds focus on stocks outside the U.S? – O.L., Madison, Mississippi

A. Yup! Many major mutual fund companies offer a wide range of index funds. At Vanguard, for example, the Vanguard Total International Stock ETF (ticker symbol: VXUS) covers the world market except for U.S. stocks. The Vanguard FTSE Emerging Markets ETF (VWO) focuses on developing economies, which can be riskier but grow rapidly. Among many others, you’ll find the Vanguard FTSE Europe ETF (VGK), the Vanguard FTSE Pacific ETF (VPL) and the Vanguard Total International Bond ETF (BNDX).

My dumbest investment

My most regrettable investment move was buying shares of Facebook at around $18 per share when the stock dipped after its IPO – and then selling them soon after at $27. I never thought it could ever become what it has become. – B.J., online

The Fool responds: At least you netted a 50% gain. Investing in initial public offerings, or IPOs, can be risky. Shares of Facebook (now known as Meta Platforms) dropped after debuting on the public market, as many IPO stocks do.

Some debut at higher-than-planned prices due to breathless demand or are bid up in their first few days, only to fall back to more reasonable levels when enthusiasm wanes.

Some post-IPO drops can be severe: After going public, Uber’s stock spent a year and a half below its IPO price before briefly surpassing it, and it moved back under the offering price throughout 2022 and the first half of 2023.

But remember that Facebook had its IPO way back in 2012, when it had around a billion active users each month. It wouldn’t have been unreasonable to doubt that it could attract many more. In such situations, if you’re on the fence, you might sell only a portion of your shares and hang on to the others. After all, blockbuster stock gains generally happen when you hang on to terrific growers for many years, if not decades.