Ford Motor on Wednesday evening delivered higher than expected profits in the first quarter, driven by strength in its commercial business. Positive updates to its full-year outlook helped send shares rallying by roughly 2.5% in after-hours trading. Automotive revenue increased 2% year over year, to $38.89 billion, missing analysts’ forecasts of $40.1 billion, according to estimates compiled by LSEG. Adjusted earnings-per-share fell 22% to 49 cents, beating EPS estimates of 42 cents. Earnings before interest and taxes declined 19% from last year to $2.76 billion, but the EBIT was better than the $2.47 billion analysts forecasted. Ford Why we own it : We’re in Ford due to management’s focus on getting out of money-losing businesses, increasing product quality, and quickly shifting production based on consumer preferences. All of these factors stand to support higher earnings and cash flow over time, which will in turn lend themselves to greater shareholder returns via dividends and buybacks. Competitors : General Motors , Tesla and Stellantis Weight in portfolio : 2.14% Most recent buy : Dec. 29, 2022 Initiated : Nov. 24, 2020 Bottom line Ford’s results show it is off to a solid start to the year. Profits came in much better than expected, thanks to its Ford Pro unit, which every quarter looks more and more undervalued and misunderstood by Wall Street. In fact, one analyst on the conference call —influential Adam Jonas of Morgan Stanley — speculated that a 10 times EBIT multiple on the Pro business alone could value the segment at double Ford’s entire market cap of $51.75 billion. The momentum in Pro and the durable profits it generates is why we continue to be baffled by how Ford trades at one of the lowest price-to-earnings (P/E) multiples in the S & P 500 . To take advantage of this disconnect, we’ll continue to press management to initiate a buyback. We understand the investment needed to scale electric vehicles and execute its Ford+ corporate strategy, but the cash flow will be there to balance it all, especially if management makes good on its word to improve quality and reduce costs. F YTD mountain Ford Motor YTD It’s been hard owning an automaker the last few years, but Ford’s ongoing capital discipline, willingness to pivot back toward hybrids and internal combustion engine (ICE) vehicles, the strength in Pro, and potential progress on quality control/warranty costs keep us in the name. We’re keeping our price target at $15 and maintaining our 2 rating, meaning we would look for a pullback before considering adding to our position. As of Wednesday’s close, Ford shares have gained more than 17% in the past three months. Quarterly commentary Ford Blue , which represents Ford’s gas-powered and hybrid vehicles, saw volumes and revenues down 11% and 13%, respectively. The $21.8 billion sales result was dragged lower by the delay in production of the new 2024 F-150 pickup, which is now being delivered to customers and dealers. Profits fell 65% from last year to $905 million due to the lower volumes but also the mix. Material costs and higher warranty also dragged lower the results, though there was a benefit from lower structural costs. Still, we’re pleased to see that Ford was profitable in every market the automaker operates in around the globe, a positive reflection of the significant restructuring actions CEO Jim Farley and management have undertaken through the years. Ford’s hybrid strategy is working as well. Sales grew 36% in the quarter and are becoming a large part of its global mix. Sales at Ford Model E , the electric vehicle division, delivered weak results with volumes down 20%, with revenue down 84% to $100 million. Both measures reflect industry-wide pressure. The lower volumes shouldn’t be much of a surprise given Ford’s pivot toward making more in-demand hybrids and ICE vehicles. Neither should the increase in losses by $600 million to $1.32 billion from the lower pricing. We expect Ford to remain disciplined with its EV strategy going forward, matching production and investment with demand. To this point, the company is committed to selling cars that will be profitable in their first 12 months. If it’s going to lose money, Ford won’t make it. Here’s an example of how Ford is taking back control of its EV destiny. It delayed the launch of its three-row crossovers by two years to wait for EV demand to improve and to take advantage of new battery chemistry and formats that will reduce the cost for that vehicle. The best story at the automaker right now is Ford Pro , the unit that houses the company’s commercial vehicles. It delivered an exceptional quarter with volumes and revenue up 21% and 36%, respectively. Sales were $18 billion for the quarter. Operating profits more than doubled to $3 billion from last year and crushed expectations. Margins of 16.7% exceed management’s target of the mid-teens. The strong results were driven by higher production of the Super Duty Truck, growth in software and physical services, and operating leverage. Software and physical services remain compelling, given the sticky and recurring revenue generated at a high gross margin in the 40% to 50% range. Ford now has about 700,000 paid software subscriptions, up from about half a million in the fourth quarter and 47% year over year. Touching on quality, which has been a longstanding concern of ours, Ford explained it is making “real progress” on its goal of making better vehicles. Farley explained that through three months of service, the quality of its 23 model vehicles is 10% better than the previous model year. The current model year is another 10% improvement. These are steps in the right direction, but more must be done to reduce recalls and lower warranty costs. Adjusted free cash flow was a miss with a usage of about $479 million versus the expected generation of about $1.67 billion. The difference can be explained by the working capital effects from about 60,000 vehicles sitting in inventory at quarter end, which will be shipped in the second quarter. Full-year guidance Ford’s commentary for 2024 is another reason why the stock was higher Wednesday night. The company continues to expect its adjusted EBIT to be in the range of $10 billion to $12 billion, but management now sees the business tracking toward the higher end. This may not be a formal raise, but the consensus was sitting closer to the lower end at $10.4 billion and therefore numbers will likely be revised higher. Ford raised its adjusted free cash flow outlook for the year by $500 million to between $6.5 billion and $7.5 billion. Much like last year, analysts are oddly down on Ford’s ability to generate cash this year based on the consensus estimate of $4.35 billion. With $25 billion in cash and $43 billion in liquidity at quarter end, we continue to believe buying back shares at the stock’s low single-digit P/E multiple would be a good use of cash. With the company planning on spending less money on EVs this year, management lowered the top end of its guidance range by $500 million to $9 billion. The company expects full-year capital expenditures to be $8 billion to $9 billion but said it’s managing toward the lower end. Lowered capex with higher profits is what we want to see because greater capital efficiency should translate to a higher multiple. However, the capex revision was mostly reflected already with the consensus estimate at about $8.5 billion. Ford continues to expect to achieve $2 billion in cost reductions in areas like materials, freight, and manufacturing. The company’s segment-level EBIT outlook is unchanged as well. (Jim Cramer’s Charitable Trust is long F. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Ford Motor on Wednesday evening delivered higher than expected profits in the first quarter, driven by strength in its commercial business. Positive updates to its full-year outlook helped send shares rallying by roughly 2.5% in after-hours trading.