While disappointing, Ford’s third quarter made something else apparent: There’s still upside.
Ford Motor Company (F -0.68%) just turned in a slightly disappointing third-quarter earnings result, which sent the stock tumbling roughly 10% initially. High costs, supplier issues, rising uncertainty and warranty costs all weighed down on the results.
However, with the stock trading at just 11 times price-to-earnings, and offering a robust dividend yield of 5.2%, is there any upside in owning the stock right now?
Not all that bad, but not great, either
Ford’s third quarter wasn’t all bad, with revenue increasing 5% to $46 billion, which marked the 10th consecutive quarter of year-over-year revenue growth. Net income was down $0.3 billion to $0.9 billion due to a previously announced $1 billion electric vehicle (EV) related charge. Adjusted earnings before interest and taxes, or EBIT, increased $352 million to $2.6 billion, driven by higher volume and a more profitable sales mix.
While third-quarter adjusted profit per share matched analyst estimates, the results were underwhelming. That said, there’s certainly upside with Ford stock at these levels, considering three things could improve drastically: its losses on its EV division, model-e, subscriptions to Ford Pro commercial division, and declining warranty and general costs.
Where’s the upside?
Ford Pro, again Ford’s commercial division, has been a bright spot for the automaker in 2024. In fact, during the first nine months of 2024, Ford Pro has generated $7.4 billion EBIT with 14.6% margins. That compares favorably to its traditional Ford Blue business that generated $3.7 billion EBIT on 5% margins over the same time frame.
The upside with Ford Pro, besides its high-demand Super Duty and Transit vehicles, is subscriptions to its software and fleet services. Paid subscriptions to Ford Pro Intelligence were up 30% during the third quarter to nearly 630,000, and repair orders fulfilled by the company grew by 70%. For investors, it’s important to note that Ford Pro’s high margins are driven in part by these lucrative software and services subscriptions.
Digital services and subscriptions is a market expected to grow significantly over the next decade, and while Ford Pro customers are more quickly adopting the services and subscriptions, eventually that will filter down into technology and subscriptions for mainstream consumers, helping Ford Blue margins in the future.
There is also upside potential with the company’s model-e EV division, despite its losses of $1.2 billion in the third quarter alone, and roughly $3.7 billion over the first nine months of 2024. This upside is simply addition by subtraction, as scale and the costs of batteries improve.
The company should eventually break even, propelled by the growing EV market share of new-vehicle sales, and that should add billions to the bottom line annually. However, it will take at least a couple of years before a meaningful impact happens to the bottom line. But as the market realizes this potential, it should bid up the stock price sooner.
Finally, Ford has been facing challenges with high warranty expenses of late, which had also contributed to a disappointing second quarter. While management notes that costs, in general, have improved, and the company is in a better position than competitors, inflation and warranty costs have offset those improvements. The latter is improving and should continue to improve in the near term, but management warned it could take another 18 months to totally reverse the problem, as newer vehicles take over the sales mix.
What it all means
Ford has largely disappointed investors in 2024, and the company can’t seem to get control of warranty and other costs, which is certainly disappointing considering cross-town rival General Motors seems to be thriving.
However, investors can ride Ford’s healthy dividend in the near-term while the automaker reverses losses in its model-e division, continues to add paid subscriptions of high margin business to Ford Pro, and continually improves vehicles so warranty costs are no longer weighing down profits. There’s upside with Ford stock, no doubt, but management needs to execute sooner rather than later or its stock will continue to spin its tires.
Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
