Buy Ford shares because automaker’s profitability will surprise the skeptics: Jefferies

Wall Street analysts are underestimating Ford Motor's ability to cut its costs, according to Jefferies.

The firm raised its rating to buy from hold for the automaker's shares, saying the company will report profitability above expectations in two years.

"Despite being perceived a laggard, we think Ford is early among global OEMs in re-evaluating how it allocates capital, a process most OEMs outside NA have yet to address. Ford is getting no credit for ambitious but credible cost targets and for multiple operating and strategic levers still available to improve market and product exposure," analyst Philippe Houchois said in a note to clients Tuesday. "Rarely have we seen an OEM generate so little passion."

Ford shares were little changed Tuesday as the overall major averages declined.

Houchois noted how nearly 75 percent of analysts covering Ford have a hold or sell rating on the stock, according to FactSet.

Ford shares have underperformed the market this year. The stock declined 7.9 percent year to date through Friday compared with the S&P 500's 1.8 percent return.

The analyst increased his price target to $14 from $13 for Ford, representing 21.6 percent upside from Friday's close.

He cited Ford's recent long-term cost reduction target of $25 billion. Houchois said car companies historically have a strong track record of achieving cost-cutting guidance.

As a result, he predicts Ford will generate an operating profit margin of 7 percent in 2020 versus the Wall Street consensus of 6.1 percent.

"Ford is one of few OEMs with a 'fortress' balance sheet, even if we assume some restructuring/exit costs. Beyond protection against cyclical risk, we think bsheet strength will be a critical factor to implement mobility businesses, while the value of 'winner take all' and 'first-mover' strategies is unclear," he said.