The Silver Lining for Ford Investors

Investors hoping for a rebound in the stock of Ford Motor Company (NYSE: F) following its third quarter were quickly let down as the automaker released largely disappointing results. Management also noted numerous headwinds going into the fourth quarter, including weaker consumer sentiment, sales-mix shifts, and intensifying electric vehicle competition, among others.

Despite all the doom and gloom, however, there is a silver lining for Ford investors: the potential for upside remains.

There is reason for optimism

For the second quarter in a row, higher costs and warranty expenses held Ford's earnings potential back. While frustrating, it does offer upside for investors as the company works new vehicles through its pipeline, slowly turns around higher warranty costs, and improves operational efficiency to lower other expenses.

"Clearly our strategic advantages are not falling to the bottom line the way they should," CEO Jim Farley said on a call with analysts, according to Automotive News. "Cost, especially warranty, has held back our earnings power. But as we bend that curve, there is significant financial upside for investors."

More upside can be found in Ford's blossoming commercial business, Ford Pro. In the third quarter, that division generated $1.8 billion in earnings before interest and taxes (EBIT) with a margin of 11.6%. Its revenue jumped 13% year over year to $15.7 billion.

It's not a one-quarter wonder, either. Through the first nine months of 2024, Ford Pro has generated $7.4 billion in EBIT at a 14.6% margin, compared to Ford's traditional business, Ford Blue, which generated just over $3.7 billion in EBIT at a 5% margin.

Ford Pro's juicy margins are partly driven by its subscription and services business, which are high-margin transactions. In fact, paid subscriptions to Ford Pro Intelligence were up 30% in the third quarter to nearly 630,000, and repair orders fulfilled by the automaker grew by 70%. More broadly, paid software subscriptions overall were over 805,000, near 40% growth, with gross margins exceeding 50%.

What it all means

For some investors, this might seem like the same song and dance from management about costs. It's been over a year since Ford noted it was billions in costs behind its competitors, and it's still a problem on a quarter-to-quarter basis when it comes to the bottom line.

But for patient investors who have faith that management will eventually lower its costs to competitive levels, while also reining in losses from its electric vehicles, there is significant upside on the bottom line in the near term. Ford also offers a robust dividend yield of 5.2% while you wait for management to fix its cost woes.

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