Ford’s 27.1% return over the past six months has outpaced the S&P 500 by 12.8%, and its stock price has climbed to $13.15 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in Ford, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.

Why Do We Think Ford Will Underperform?

We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons we avoid F and a stock we'd rather own.

1. Sales Volumes Stall, Demand Waning

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Automobile Manufacturing company because there’s a ceiling to what customers will pay.

Over the last two years, Ford failed to grow its vehicles sold, which came in at 1.16 million in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Ford might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. EPS Took a Dip Over the Last Two Years

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Sadly for Ford, its EPS declined by 22.5% annually over the last two years while its revenue grew by 4.3%. This tells us the company became less profitable on a per-share basis as it expanded.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Ford’s $161.9 billion of debt exceeds the $42.19 billion of cash on its balance sheet. Furthermore, its 9× net-debt-to-EBITDA ratio (based on its EBITDA of $13.67 billion over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Ford could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Ford can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Ford doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 11.3× forward P/E (or $13.15 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. We’d suggest looking at the Amazon and PayPal of Latin America.

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