On Tuesday, Goldman Sachs (NYSE:GS) raised its rating on Ford Motor Company (NYSE:F) stock from Neutral to Buy and increased the price target to $13.00, up from the previous $12.00.
The firm highlighted the potential for improved profit margins, particularly through Ford's commercial business, Ford Pro, which boasts mid-teens EBIT margins, and a growing software and services mix.
Ford is aiming for $1 billion in software revenue by 2025 and expects software and physical services to contribute 20% to Ford Pro's EBIT by 2026. The company's paid subscriptions have seen a compound annual growth rate (CAGR) of 35-40% or more. Goldman Sachs sees a long-term opportunity for Ford in areas such as fleet services and advanced driver-assistance systems (ADAS).
Cost-reduction efforts in both internal combustion engine (ICE (NYSE:ICE)) vehicles and electric vehicles (EVs) are anticipated to help Ford counterbalance broader industry challenges, including international competition and certain price-mix headwinds. Despite these challenges, the firm believes Ford's shares have room for growth.
Year-to-date, Ford's stock has seen a 13% decrease, in contrast to the S&P 500's 21% increase. This decline has been attributed to cyclical concerns and higher-than-expected warranty costs in the first half of the year.
However, the stock is currently trading at approximately 5 times Goldman Sachs' next twelve months (NTM) earnings per share (EPS) estimate, which is at the lower end of its historical range of 5-10 times.
Goldman Sachs projects a 23% upside to its revised 12-month price target of $13 for Ford, which, when including the 6% dividend yield, could result in an approximate 30% total return for shareholders.
In other recent news, Ford Motor Company has announced an initiative to offer free home chargers with installation to buyers of select electric vehicle (EV) models through the end of 2024. This move is part of a broader industry trend to enhance the EV ownership experience.
Despite cost-cutting measures and projected losses in its electric unit, Ford's EV sales have been on the rise, with a 72% increase from the previous year. The company also recently partnered with Tesla (NASDAQ:TSLA) to integrate into the EV charging network.
In a recent development, a proposed rule by the Commerce Department to prohibit Chinese connected vehicles and certain Chinese software and vehicle hardware from being used in American cars could potentially decrease U.S. auto sales by as much as 25,841 vehicles annually. This move is expected to increase vehicle prices and impact the competitiveness of U.S. automakers globally.
Morgan Stanley (NYSE:MS) analysts have downgraded Ford's rating to "equal weight" from "overweight" and reduced its price target to $12 from $16, citing industry challenges such as falling prices and increased competition. Meanwhile, Stellantis (NYSE:STLA), the fourth-largest automaker globally, is aiming to adopt a cost-effective strategy similar to Chinese EV makers to stay competitive amidst these challenges.
All these developments reflect the rapidly evolving and competitive landscape of the global auto industry.
InvestingPro Insights
To complement Goldman Sachs' optimistic outlook on Ford, recent data from InvestingPro provides additional context for investors. Ford's current market capitalization stands at $41.98 billion, with a P/E ratio of 10.93, suggesting the stock may be undervalued relative to its earnings. This aligns with Goldman Sachs' view that Ford's shares have room for growth.
InvestingPro Tips highlight Ford's significant dividend payments to shareholders, which is consistent with the 6% dividend yield mentioned in the article. The company has maintained dividend payments for 13 consecutive years, demonstrating a commitment to returning value to investors. This track record supports Goldman Sachs' projection of a potential 30% total return for shareholders when factoring in the dividend yield.
However, InvestingPro also notes that Ford suffers from weak gross profit margins. This insight underscores the importance of the cost-reduction efforts and margin improvement strategies outlined in the article, particularly in Ford's commercial business and software services.
For investors seeking a deeper analysis, InvestingPro offers 8 additional tips that could provide further insights into Ford's financial health and market position.
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