Here's Where the Upside Is for Ford Motor Company Investors

Key Points

• Ford has been working for years to offset a cost disadvantage to its rivals.

• Warranty costs as a percentage of revenue have been on the rise.

• Reversing electric-vehicle losses will be a huge boost to the bottom line.

• 10 stocks we like better than Ford Motor Company ›

Almost three years ago, executives at Ford Motor Company (NYSE: F) expressed frustration with its financial results, noting that "fundamental change" would be needed in how the automaker engineered, sourced, and produced vehicles. Ford's then-CFO, John Lawler, said at the time that costs added up to a staggering $7 billion to $8 billion disadvantage for Ford compared to its traditional rivals.

There's certainly upside on the bottom line for long-term investors if Ford can simply fix its cost disadvantage. Here are two significant ways the company can, in the near term, do just that.

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Warranty costs

Ford is currently setting a historical full-year record for recalls in the U.S. market, with an alarming record of 109 recalls -- the next closest competitor is Stellantis, with 30. Ford also recently announced a global recall of 1.9 million vehicles due to a rearview camera issue that caused inverted, distorted, or blank images, according to the National Highway Traffic Safety Administration (NHTSA). It should also be noted that this recall can't be fixed over the air and will require at least some dealership involvement, which could mean higher warranty costs for the automaker.

This is a bigger deal than you might think. In fact, during last year's second-quarter results, Ford posted a big miss on earnings estimates due to a spike in warranty costs. Warranty and recall costs in the quarter totaled $2.3 billion, which was a staggering $800 million more than the previous quarter and $700 million more than the prior-year quarter.

While the automaker has said for years that improving quality is a key priority, results haven't been in a straight line. You can see Ford's rising warranty costs as a percentage of revenue in the graphic below:

Data source: Ford filings with the U.S. Securities and Exchange Commission. Chart by author.

Going electric

While the future is certainly driving toward electric vehicles (EVs), the truth is that very few are profitable for global automakers at the moment; battery costs remain a significant chunk of the cost. Ford's "Model e" division, responsible for its EVs, lost a staggering $5.1 billion in 2024.

That led Ford to take a drastically different approach. It transformed its traditional assembly line into an "assembly tree." It's designed to increase efficiency by having three subassemblies running their lines simultaneously before joining parts together. The company expects to see a net 15% gain in production speed at its Louisville Assembly Plant, compared to current vehicles it manufactures.

Ford is also introducing a universal EV platform that's expected to reduce parts by 20%, with 25% fewer fasteners and 40% fewer workstations in the plant. This platform should be great news for bringing down costs and improving scale, as it will underpin as many as eight EV models, beginning with an electric pickup truck in 2027. Most importantly, Ford believes the electric pickup truck will be profitable very early on.

Image source: Ford Motor Company.

If Ford can successfully build scale while improving efficiency and lowering costs, it will be a huge win for the company in its ambitious effort to narrow its cost gap compared to rivals.

What it all means

There are a couple ways to look at this, depending on whether you're a "glass half-full" or "glass half-empty" investor. On one hand, recalls and quality issues have plagued Ford for the better part of a decade, and have occasionally dinged its bottom-line earnings. It's discouraging that Ford hasn't made more progress, and is currently setting an all-time record for annual recalls.

But on the flip side, this does suggest that there's significant upside on the company's bottom line once it finally gets a handle on quality issues and warranty costs. Along with that upside, Ford may turn its EV business unit from a zero -- considering the financials, that's being nice -- to a hero. If you believe Ford will eventually solve these issues, you have a compelling investing opportunity.

Should you invest $1,000 in Ford Motor Company right now?

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Daniel Miller has positions in Ford Motor Company. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.