Ford (F -0.72%) is a misunderstood business. Investors appear to be simultaneously undervaluing its highly profitable gasoline-powered businesses and dismissing its tantalizing potential in electric vehicles (EVs).
Therein lies your opportunity.
The auto leader's shares could be drastically undervalued today, but perhaps not for long. Here are three reasons why you might want to consider buying some Ford stock today -- before other investors realize their mistake.
1. Ford Blue and Ford Pro are profit machines
Ford's new reporting format gave investors a chance to see just how profitable its traditional auto business is. Ford Blue, as the division is called, generated $25.1 billion in revenue and $2.6 billion in operating earnings in the first quarter alone.
The automaker's commercial fleet operations, known as Ford Pro, are also a cash generator. The division produced operating earnings of $1.4 billion on revenue of $13.2 billion.
Both businesses could see their profitability continue to strengthen. Cost-reduction initiatives at Ford Blue and a greater focus on software offerings at Ford Pro are likely to positively affect the segments' profit margins.
In all, management expects Blue and Pro to post full-year operating profits of roughly $7 billion and $6 billion, respectively, in 2023.
2. Ford E is a powerful growth driver
While its gasoline-powered businesses crank out cash, Ford is gearing up to aggressively scale its electric vehicle (EV) operations. The auto titan is targeting 600,000 EV sales per year by the end of 2023 and 2 million by the end of 2026, up from fewer than 62,000 in 2022.
These efforts won't come cheap. Ford expects to lose about $3 billion on EVs in 2023. But management is laser-focused on slashing costs. During the company's first-quarter earnings call, CEO Jim Farley said Ford intends to cut the production cost of its popular Mustang Mach-E electric sports utility vehicle (SUV) by as much as $5,000 per vehicle by the end of the year. This should help Ford improve its profit margins even as it reduces the price of the Mustang Mach-E by several thousand dollars to boost sales.
Ford plans to switch to less expensive lithium-iron-phosphate batteries to further reduce the costs of its EVs. The auto giant also struck supply deals with lithium producers, such as Albemarle and Sociedad Quimica y Minera de Chile, to secure the raw materials it needs to hit its EV production targets.
Additionally, Ford reached an agreement with Tesla that will provide its customers with access to over 12,000 Tesla Superchargers in the U.S. and Canada. The partnership will greatly expand the number of charging locations available to buyers of Ford's EVs. This should help to reduce the so-called "range anxiety" that prevents some people from buying an EV, thereby increasing the pool of potential customers for Ford.
All told, Ford believes its Model E division can achieve an operating margin of approximately 8% by the end of 2026. If it can do so, EVs will go from a source of losses to a powerful profit driver in the coming years.
3. The stock is cheap
Best of all, Ford's shares can be had for only about 5.5 times its projected operating earnings in 2023. That's a bargain price considering Ford's current cash-generation abilities and intriguing EV-fueled growth prospects.
Ford's current stock price reflects the market's uncertainty that the automaker can successfully transition to an electrified future. But if the venerable car and truck manufacturer can make the shift -- and management is adamant that it can -- investors could soon come to realize that Ford's stock is significantly undervalued. That, in turn, would lead to sizable gains for those who buy shares today.
