Ford or General Motors: Which is the better value?
In a rising auto market, both hold great appeal, but investors should roll with the stronger operator.
By David Sterman
While watching sports on TV last weekend, I saw dozens of car commercials. It's understandable why automakers are spending so heavily on ads these days: Put simply, business is good.
An industry that struggled to sell more than 10 million vehicles in North America in 2009 continues to strengthen: 15 million vehicles may find a home this year, judging by March sales data. That figure could actually hit 15.7 million, which would be less than 10% below the all-time highs set during the past decade, according to Edmunds.com.
Yet, as I've noted in many columns about automakers, you simply can't compare these companies' recent performance with the past decade. As Goldman Sachs' analysts noted in an April 15 report, "Detroit has come back from the depths of the crisis stronger and more profitable than ever."
In fact, the auto industry is so much stronger now, in so many respects, that an investment in almost any automaker or auto parts supplier makes a great deal of sense -- especially in light of the fact that their valuations discount the strides they've made.
About a month ago on the Street Authority, I pointed out the hidden value in auto parts suppliers, and I remain especially keen on the automakers themselves. If you have a multi-year time frame, you stand to generate robust returns with either Ford (F) or General Motors Co. (GM).
Still, if you had to choose just one, which one would it be?
I did a similar analysis on the Street Authority back in August 2011 and gave a slight edge to Ford. Since then, Ford and GM have posted gains of 25% and 10%, respectively, compared with a 30.5% gain for the S&P 500.
To my thinking, the fact that both automakers have lagged behind the S&P 500 since then isn't a sign of trouble -- it means they hold even greater value, relative to the rest of the market, than they did back then.
Although Ford emerged from the recession as the more impressive operator, GM is starting to get its game together as well. The company's various vehicle lines are in the midst of a refresh -- including a new Corvette, upgraded Cadillac sedans and a new full-size pickup -- which is helping to boost pricing and margins. In fact, fully 33% of GM's vehicles will be upgraded in the next 12 months, which is the highest percentage in the industry, according to UBS.
GM still holds 17% of the North American car and truck market thus far in 2013, compared with a 16% share for Ford. GM also has a somewhat stronger presence in foreign markets outside of Europe, including the all-important Chinese market. Ford is building seven manufacturing plants across Asia to help build market share in that region, but the benefits of that investment are probably several years away.
Ford's areas of relative strength:
- A tighter line on inventories at dealer locations, which enables it to reduce the size of discounts and incentives it must provide to move the metal. (GM provided $3,400 in discounts per vehicle in March, compared with $2,800 for Ford, according to TrueCar.com.)
- A path to sharply reduced losses in the troubled European market: Ford could reach a break-even point in that market by next year, possibly a year ahead of GM. GM's decision to invest in France's Peugeot has not been well-received by analysts, as it may take management attention away from the need to shrink GM's European expense base.
- Ford has the industry's most efficient use of engines, suspensions, interiors and other equipment that is shared across vehicle lineups.
- Ford will embark on an aggressive product refresh in 2014 and 2015, after GM's big new vehicle push slows down.
Let's compare the key financial metrics:
The first lines you should note are two measures of organizational efficiency. In terms of earnings before interest, taxes, depreciation and amortization (EBITDA) margins and return on invested capital, Ford remains the far stronger player.
And while GM sports a price-to-earnings (P/E) ratio and EBITDA ratio that are lower than Ford's, it has trailed badly in terms of free cash flow. That's why Ford is now paying a dividend and is expected to boost it at a rapid clip, while GM is not yet doing so. Ford has thus far used its prodigious free cash flow to reduce its debt load by roughly $20 billion during the past few years.
Will GM eventually focus on dividends and share buybacks? With "several years of strong cash flow ahead, there is excess liquidity that we expect will ultimately make its way to shareholders," said Goldman's analysts.
To be sure, GM's $21 billion net cash position is more impressive than Ford's $10 billion. But Ford's pension plan is in far healthier shape, and GM will likely have to drain away a sizable chunk of its current cash to shore up its pension.
Risks to Consider: If Ford and GM can't sharply reduce their losses in Europe, both firms will remain out of favor. Both automakers have made huge bets on China and need its economy to continue expanding.
Action to Take: GM is in better shape than you might think. The current management team is making many smart moves, and were it not for Ford's even more impressive turnaround, GM would be garnering more buzz. Still, Ford continues to carry the torch in this industry with its superior set of management decisions. Although shares of GM may look like a slightly better value, it's wise to stay with Ford, the industry's pacesetter.
David Sterman does not personally hold positions in any securities mentioned in this article.
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Considering that Ford does NOT have my money tied up in a bailout, I'll pick a Ford ANY day of the week.
Oh, and for you lefty followers out there, yes, GM DOES STILL OWE BILLIONS TO THE GOV'T (TAXPAYERS)...
WHEN DO WE GET PAID BACK??????
THE TRUTH: WE WILL LOSE. The Treasury has already lost 1.6 BILLION (FACT) from the Chrysler bailout, GM's is "to be determined", we MAY learn the full "truth" about how much (estimates are around 12 BILLION).
Nice to know that the next 3 generations of kids will be paying for GM's cluster**ck accounting...
Yep, like the commercial says, "Chevy runs deep"...
Now if you all will excuse me, I've got to run to Walmart and get my Vaseline seeing I just did my taxes...
A dis-satisfied customer and voter...
Seeing MSN's other Money segment on Regal theatres being boycotted because of their ObamaCare decision - here's some reality for MSN Money - I DO NOT CARE IF GM WERE 100 TIMES BETTER THAN FORD....
I have not considered, nor will I EVER even consider a G(overnment) M(otors) vehicle again in my life - and this is from somebody who had previously purchased GM's from 1990 and up to Obama's takeover. I will go out of my way to purchase a foreign car before I ever buy one. That is reality. Obama has done a great job of dividing us. It's gonna take a lot more than words to united us. MAYBE my kids will buy a GM someday, but NOT if I can help it.
" It's understandable why automakers are spending so heavily on ads these days: Put simply, business is good."
I beg to differ. The deals most of these ads are touting sound like desperation. The only reason sales are up is because so many years of flat or falling sales have left the public with a fleet of old vehicles that have to be replaced. But we're still trying to squeeze a few more miles out of what we already have anyways, due to the poor economy still crimping our budgets.
You're confusing estimated sales with actual sales. Or counting your chickens before they hatch.
Your inside-the-business analysis is mostly valid, but in the end profits come from actual sales. Cutting costs tends to hurt quality, which in turn hurts reputation, which in turn hurts sales.
Rely upon China's economy expanding? Pretty risky. China has been artificially propping up its own economy for decades and could collapse at any time. Meanwhile they lack infrastructure and enough affluent buyers to afford to import cars from America. Most of their population can't afford to buy a vehicle, even if they had decent roads to drive on and access to fuel.
Overall Ford offers a broader and more modern technology base. Ford has more hybrid models than GM, and a pure electric. Whether these cars hold up over time or not, Ford is demonstrating more technology leadership and investment than GM. That positions them to hold better future potential. Unless GM unveils a hidden gem (like Toyota did in the early 2000s with the Prius) it will continue to lag behind Ford (as well as several others).
Dang, and I used to be a GM man.
I thought this was about the stocks....Not some of the Moron's choices in vechicles...??
You must be imbeciles because you can't READ...?
Own Ford stock, buy Chevys....There, fixed it for you..
Only "closet communist" by GM products...WTF is the matter with you,idiot.
We want GM to "pay back the rest" of the taxpayer funded loan/bailout...
How the hell do you think they do that?....Moron.
GM WAS run poorly, they have completely turned it around. Even the CEO of Ford, Alan Mullaly, at the time lobbied for the bailouts, he was smart enough to know that had they not happened Ford would have went out of business too. Supply costs would have skyrocketed, and none of us would have been able to buy a car. Think about it, GM and Chrysler bailouts saved the entire auto industry.
Gm is a completely different company now, there cars, pickups and SUVs are good quality, and mpgs are getting better and better, as are Ford and Chrysler.
The American auto companies have come along way, and or sure are no longer 2nd fiddle to imports, all of the big 3 are good quality vehicles.
I've always been a chevy fan. But with GMAC being controlled by the same people who brought us Obama care.... I'll look at Ford/Dodge or anybody else before chevy.
Just wish the Ford will bring back the 7.3 L . BEST MOTOR EVER.
I see only a handful of post relating to the topic of the article, the rest are personal stories on why they hate one brand over the other, with some political crap thrown in for good measure...
As an investor my money has and probably will be on Ford in the future for a number of reasons. Here's a few:(1) The Ford public brand image nowadays is generally looked upon favorably, and analysts seem to love Alan Mullaly and his execution. (2) Their product line has very little overlap, easier, more confident consumer experience and easier sale. (3) I also like their return on investment as well as cash stockpile. This tells me they are running lean and are set up for continual improvement in the long term..
Now back to Obama, bailouts, and your 83 Mustang II..
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