American automaker Ford (NYSE:F) reported third-quarter earnings on Oct. 28 and beat Wall Street estimates by a wide margin. After a rocky start to the year the company finds itself back on its feet once again. The boost in earnings amidst a surging pandemic is definitely out of the norm, but Ford stock has benefited from several trends this year.
The impressive earnings has analysts feeling optimistic about the future of the company, despite its long-running challenges.
With a new management team to lead the way and lucrative investments, Ford sees brighter days ahead.
Here’s why this stock is a great investment in today’s volatile market.
A Clear Road To Recovery For Ford Stock
Ford’s Q3 earnings were spectacular by all counts. The company beat analyst estimates at both its top and bottom lines. Revenue for the period was recorded at $34.7 billion, beating estimates by $1.2 billion. Earnings per share (EPS) of 65 cents per share beat a forecasted 19 cents per share.
Ford’s largest revenue generator is its North America business segment, earning $3.18 billion in operating income for the period. However, the company’s international businesses in Latin America and China continue to lag behind. This hints at an area for improvement in the future.
A large catalyst for an increase in revenue is a higher product net price, according to Ford’s management. The pandemic led to a decrease in the use of public transport in lieu of social distancing measures.
At the same time, many people moved from big cities to the suburbs. Both trends led to a surge in the demand for cars and allowed Ford to charge a higher net price. Vehicle shipments for Q3 increased to 651,000 from 639,000 in the same period last year.
Looking ahead, the company sees a lot of areas of improvement in its current operations. A more streamlined production flow will be bolstered by the release of its new vehicles in Q4. The new F-150, the Bronco Sport and the Mustang Mach-E are all on track to make its debut in 2021.
Following its spectacular earnings, Ford stock was up more than 6%.
An Electric Future
A key area of growth for Ford is its development of autonomous vehicles. Ford plans to invest $1 billion in tech company Argo AI to initiate this production. While the segment is still in its nascent stages, the company believes it will drive revenue in the future.
The cars will either be licensed to companies such as Uber (NYSE:UBER) or Lyft (NASDAQ:LYFT) or to individuals through a subscription program. The subscription will also include services like music streaming to maximize revenue. Ford estimates it will sell $100,000 hands-free cars in its first year.
Although Ford prides itself on its classic vehicles like the F-150, it now has a strong focus on AI technology to drive future revenue. The company was an early adaptor of AI and believes this will result in a recurring stream of revenue in the coming years. While its car sales saw an impressive surge this year, relying on this for the long-term will be detrimental to Ford stock.
Hence, Ford’s new management has taken a proactive stance on the development of electric cars. Not only will this give the brand a new and improved image but it will also help the automaker compete with more niche electric car companies. In an effort to spearhead the growth of this segment, Ford announced the opening of its new electric vehicle center. This plant will assist with the development of the electric F-150 set to launch in 2022.
The Bottom Line On Ford Stock
Ford Q3 results were outstanding on all counts but there are still some inherent issues that the company needs to overcome. The automaker continues to have weak sales in international markets coupled with high restructuring costs. Moreover, the release of its new suite of vehicles next quarter will ramp up manufacturing costs. Ford management estimates this will lead to a net loss of $500 million in Q4.
Nevertheless, any short-term pullback will only set the company up for greater gains in the future. Ford has its sights set on improving its vehicle technology which will keep the company in the limelight for years to come. Moreover, the automaker’s new management team has gracefully guided the business through the Covid storm.
Ford stock fundamentals remain stronger than ever, making it a buy in my books.
On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.