GM vs. Ford: Which offers value and growth?
The automakers' prospects are brightening, but one stock is a better pick. With video.
By Jake Lynch, TheStreet
Prospects for GM (GM) and Ford (F) are improving almost daily. Wednesday, Ford chief executive officer Alan Mulally made the bold prediction that sales will rise 50% in four years as Africa and Asia demand strengthens. Ford, which sold 5.3 million vehicles in fiscal 2010, will shoot for "nearly 8 million" by 2015. Is that reasonable?
While Ford's China sales jumped 15% in May, GM has a stronger foothold in the region, recently debuting a China-exclusive brand, Baojun. Although both GM's and Ford's shares are attractive, GM is looking cheaper in light of the recent sell-off in equities.
As QE2, the Fed's record bond-buying program, ends, many investors are predicting a down-leg in stocks. If that projection proves prescient, GM's stock will deserve consideration from long-term investors. Although down 22% this year, GM's outstanding assets and growth prospects are undervalued by the market.
After its $33 IPO, GM rallied to as high as $39.48. It's now 28% lower than the 52-week high, presenting an opportunity to value investors. At an enterprise-value-to-EBITDA ratio of 3.2, a book-value multiple of 1.6 and a free-cash-flow multiple of 7.7, GM sells at respective peer discounts of 61%, 38% and 62%.
The bargain has attracted sell-side fans, though many received fees for the initial offering, presenting a possible bias. Currently, 14, or 74%, of the equity researchers evaluating GM rate its stock "buy" or "overweight," and the remaining five rank it "hold."
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With a median target of $42.67, GM may offer a 50% return, based on the consensus opinion. Other analysts see even greater upside. The unwinding of QE2 and recent poor economic data have hurt the sentiment for GM, as automakers are abnormally sensitive to the business cycle and consumer spending. Consumer confidence hit a three-month low last week, and Wednesday, GM CEO Dan Akerson noted that "there's some question about how strong the recovery will be." He cited higher oil prices and stubbornly high unemployment as headwinds.
Many investors are citing a pending sale by the U.S. government, which still owns almost 23% of GM, as a reason to delay a purchase of the stock. But the pending sale should be already priced in, and the pace of such a sale may be more gradual than once thought. Also, there are rumors circulating that GM is in talks to buy out the government's stake, perhaps by issuing debt. Such a move, though costly, would alleviate shareholder dilution.
GM is stealing incremental market share from Toyota (TM), whose production was crimped by the Japanese earthquake. UBS (UBS) says GM "will be the biggest beneficiary of the upcoming Japan-related inventory shortages, with the potential to gain as much as 110 basis points of additional share in 2011. We expect these gains can boost 2011 EBIT by $1 billion and EPS by 60 cents." UBS is the latest to join the bullish herd. It upgraded GM to "buy" in early May, on the same day that April auto sales exceeded the bank's estimate.
GM has attractive net operating losses resulting from its bankruptcy restructuring, which may allow the company to shield between $14 billion and $19 billion of its profit from taxes, adding to shareholders' bounty. Unlike in previous years, GM is focused on profitability, not market share. The globalization of the auto market should provide ample opportunity for all, so GM wants to generate high margins and profit rather than strive to outsell competitors with heavy discounting or promotion.
Barclays (BCS) likes the strategy. The bank rates GM "overweight" with a lofty $44 target, implying 52% of upside. SAAR, or the seasonally adjusted annual rate, for autos declined beneath 12 million in May from more than 13 million April, missing Barclays' forecast by about 300,000. Still, the bank says that "only a small portion of the decline (around 0.4 million units of SAAR) was due to weaker consumer sentiment." GM's May sales grew 7.7%, missing Barclays' forecast. Passenger-car sales jumped 22%, but light-truck sales dropped 2.2%. Market share gained 80 basis points.
Wednesday, as GM held its annual shareholder conference, the shares stagnated, but upon announcement of an aggressive plan to increase sales in South America, home to many of the fastest-growing emerging markets, the stock popped 1.1% intraday. GM plans to introduce 40 new vehicles in South America through 2012. Currently, it seems that manufacturing will be domiciled elsewhere, as no new plant investments were announced with the sales target. GM plans to sell at least 500,000 more cars per year in South America, starting in 2015.
Although rival Ford has a higher operating margin and 2011 cumulative profit, GM is echoing Ford's mantra of "profit, not market share," and it has a head start in emerging markets, indisputably the key growth venue for both companies. GM generated 14% of its 2010 sales from its international unit, excluding the Chinese operations. About 7% of total sales came from Brazil and 5.4% from South Korea. Although domestic woes present a headwind in 2011, longer term, stock performance will be linked to overseas growth.
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The offering could become the second-biggest this year if underwriters exercise an option to buy more shares.
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