It's been a relatively rough year for investors in shares of Ford Motor Company (F 0.49%). The company has had to pivot with its electric vehicle (EV) strategy, as sales have lagged expectations. Ford has also struggled with quality issues that have increased warranty costs.
That's led to a stock price that has dropped about 12.5% year to date, badly lagging the S&P 500 index. But one Wall Street analyst thinks that Ford has some levers it will pull to improve its business results, and now is the time to buy the stock.
Ford Pro to the rescue
Goldman Sachs analyst Mark Delaney raised his firm's rating on Ford stock to a buy recommendation and increased his price target by $1 to $13 per share. That implies more than 20% potential upside from the recent share price.
Last year, Ford reorganized the way it structured its business to separately report its individual customer-focused business segments. Those include its EV products, its traditional internal combustion engine consumer vehicles, and its commercial segment dubbed Ford Pro. The latter caters to business customers and fleets with its Transit vans and other work vehicles.
Delaney thinks the Pro business is key to improving Ford's financial results. He believes that a more profitable segment can drive overall margin improvement. Ford reported its Pro segment generated a 15% profit margin in the second quarter, compared to just 4.4% for its traditional consumer business. Ford's software and physical services is also a high-margin, growing part of its business that the analyst sees helping boost results.
Investors who can be patient could do well to follow Delaney's advice. In its second-quarter report, Ford CEO Jim Farley stated that "our underlying quality is improving." Investors should monitor that area for a sustainable shift by watching warranty costs.
If Ford can consistently realize reduced warranty costs, the stock should rise from recent levels. Right now, it is only trading at about 5 times the next year's projected earnings. It just needs to get out of its own way for investors to increase the valuation.
