Ford And GM – Seeking Alpha
The debate between Ford (NYSE:F) and General Motors (NYSE:GM) is likely to continue to rip families apart for generations to come. I guarantee there are people out there that have substantial pieces of their retirement locked up in Ford stock purely because their family has always had a Ford pickup. Good logic? Not really. Looking past that, let’s take a look at how Ford and GM compare in terms of an investment right now.
I recently embraced a long term view that despite sliding US sales, Ford is a strong investment considering its dividend and extremely cheap valuation (right around 10). General Motors is trading at an even lower valuation with a P/E of 5.6. I generally believe that if this year is lackluster for autos (which is seeming more and more likely), both companies are going to offer incredible value if their stocks drop. That being said, there are advantages and disadvantages to both.
These are both incredibly cheap stocks. I’ll reiterate that Ford and GM trade at 10x and 5.6x earnings respectively. The market simply doesn’t have the faith to drive these numbers up after the chaos that was 2008. GM has had exponentially better earnings results over the past 5 years, but trades at half the valuation of Ford. I give it points here for already being the cheaper investment.
Earnings are everything
Over the last 5 years GM more than doubled diluted earnings per share to $6.00 in 2016. Ford’s earnings have pulled back from $1.42 in 2012 to $1.15 in 2016. The return to shareholders on that front doesn’t even compare. GM Wins. This obviously helps explain the stark contrast in stock prices regardless of P/E valuation.
One of the biggest concerns I have about carmakers is their ability to manage losses in times of lower sales. GM went down in 2008 because the fallout in cashflow completely incapacitated its ability to handle is rather absurd pension obligations and finance the expense of operations. Ford has a slightly better cash position of $15.91 billion in cash on hand, while GM is sitting on $14.57 billion. With this kind of capital, I don’t think we need to worry about either company the way we were in 2008.
Iffy sales are scaring short termers in autos
So March was a sobering month for auto sales. In GM’s case it is perhaps the best story it has at the moment. The carmaker was the only American firm to produce positive US sales. It showcased a trend that’s been popping up since last October. The firestorm of auto sales that we’ve seen over the past 5 years is beginning to cool down. Some are arguing that demand isn’t all that bad. Regardless, sales and therefore profits, are not likely to be what they were in 2016. This will likely cause some to become more bearish on GM.
While I also see some trouble in the auto industry’s future, I view it as an opportunity more than anything. So, in this year where others get squeamish, we should plan to get greedy.
Remember these are not the car companies of 2005. GM’s bankruptcy essentially gutted most of the garbage that drove it into the dirt. Automakers are much more streamlined and cash intensive these days. GM has $14.57 billion in cash, with $26.41 billion in cash and short term investments. While this is not as favorable a situation as Ford’s cash position, I don’t see operating income being a problem. The problem I do see is how the company will keep justifying the dividend with negative free cashflow.
If sales as a whole decline while Truck and SUV sales increase, the profit margins for GM and Ford could actually end up being higher. Small cars don’t have the best margins, while Trucks are straight up gold mines. Ford’s best selling F-series will continue to benefit from a lower fuel expense market.
GM’s crossovers are executing at the perfect time. GM is launching a remodeled GMC Terrain this summer, that continues the company’s moves with Cadillac’s XT5 and Buick’s successful lineup of crossover vehicles. Furthermore, GMC has the highest average transaction prices in non luxury vehicles.
Long term buys
I see GM being the better buy this year. Others also see strength in the company. Morningstar analysts believe that streamlining costs offer upside for GM without requiring huge surges in sales. It’s cheaper, and has historically performed much better in the earnings department. Because it has avoided the early sales losses that Ford had in March, it probably doesn’t have as much small car inventory to free up. Avoiding those discounts will help this year’s bottom line tremendously. Plus it is already performing far better in earnings per share, at a lower P/E than Ford.
While Ford actually had a decline in corporate and fleet sales, GM’s commercial sales of Malibu’s actually increased. The company is still recognizing the shift in demand and plans to keep inventory levels equal to last year with more Trucks/crossovers/SUV’s than cars. GM’s lineup has far more crossovers than Ford. This positions them to benefit much faster from the shift in consumer interest.
Regardless, I view both companies as strong long term moves. I don’t see either letting their dividend go unless they absolutely have to. Those yields are what keep investors interested in an otherwise untrusted sector. Should GM pull back this year we’re talking about a P/E close to 1. A sales slowdown will almost definitely present opportunities to buy lower, and it makes sense to add one of these guys to the portfolio. When people are paying absurd premiums for Tesla (NASDAQ:TSLA), Ford and GM (both are involved in electric cars) offer very cheap valuations with the earnings, brand loyalty, and cash that Tesla lacks.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.