(FROM BARRON'S 2/3/14)
U.S. car sales have bounced back to prerecession levels, and Ford Motor
and General Motors are prospering. Yet their shares trade at humble levels: 11
times this year's earnings forecast for Ford and nine times for GM, versus 15
times for the Standard & Poor's 500 index. Some discount is warranted because of
the boom-and-bust history of both companies, but the current one seems too
large, considering the improvements both have made to their cost structures,
balance sheets, and vehicle lineups. That makes Ford and GM seem likely to beat
the market from here.
Choosing between them comes down to timing: Ford (ticker: F) is the
stronger company, but GM shares (GM) seem like the better bet in 2014. Ford had
a big head start in its recovery and has better cars and trucks and more
efficient manufacturing to show for it. This year, it's investing in new plants
and workers and a parade of new launches, 16 in North America, including a
radical remake of its lucrative F-150 pickup truck. The spending surge means
profits are projected to dip this year but jump in 2015. GM, meanwhile, is
hitting a sweet spot in its investment cycle, where past spending should pay off
with rapidly rising profits this year and next. GM shares could gain more than
30% over the next year, versus 20% for Ford. That doesn't include dividends;
both stocks pay 3.3%.
Ford finished the week at $14.96; GM, at $36.08.
The Great Recession sent U.S. light-vehicle sales skidding from 16.1
million units in 2007 to just 10.4 million in 2009, forcing car makers to slash
production costs, and labor unions to accept concessions on wages and benefits.
GM required a 2009 bankruptcy and government takeover to turn things around.
Ford, whether prescient, lucky or both, had already mortgaged its factories,
equipment, and real estate in late 2006, shortly after the arrival of chief
executive Alan Mulally, on an all-or-nothing bet on overhauling its products. By
avoiding GM's struggle with solvency, Ford was able to invest through the
downturn, giving it a two-year lead in product development, says RBC Capital
Markets analyst Joseph Spak.
U.S. sales have since recovered, to 15.5 million vehicles last year, up
7.5%, and both GM and Ford are solidly profitable, but Ford retains two
advantages. The first is better products. For example, Ford last year had six
models named to the U.S. News Best Cars for the Money list, compared with five
for Toyota Motor (TM), including its high-end Lexus brand, and three for GM.
Consider family sedans. The Ford Fusion and Chevy Malibu are both companies'
best contenders in years, but "the Malibu probably isn't going to lure someone
from a Honda Accord, while the Fusion might, especially if they care a lot about
exterior styling," says Jessica Caldwell, senior analyst at car-ratings site
Ford's second advantage is scale, which should not be mistaken for size.
GM is the bigger company; it's expected to report 2013 sales of $154.6
billion, up 2% from its 2012 total, when it reports results Thursday. That
compares with $139.4 billion, up 10%, for Ford, which reported last week.
But Ford is further along in its drive to consolidate platforms, and
that's what scale is all about -- offsetting high fixed costs with volume. Ford
is expected to have just 14 major car and truck architectures this year, versus
25 for GM. Morgan Stanley estimates that by 2018, General Motors will get down
to 17 platforms; Ford, to 9.
Last year, GM sold 2.8 million cars and trucks in the U.S., according to
WardsAuto, while Ford sold 2.4 million; Toyota, 2.2 million; Chrysler, 1.8
million; and Honda Motor (HMC), 1.5 million.
If Ford can hold its product and efficiency edges, its shares should
outrun those of GM over the long term, but this year favors General Motors. Last
year was a big launch year for GM and a slow one for Ford, so GM enters this
year with relatively fresh vehicles and plenty of pricing power. Its restyled
2014 Chevy Silverado and GMC Sierra pickup trucks are going up against Ford's
aging F-150 until the second half of this year, when Ford brings out its
revamped model. The new F-150 will replace steel with aluminum in the truck's
body to shed up to 700 pounds and improve fuel efficiency. The GM truck refresh
"doesn't have that push-the-needle quality Ford is going for this year," says
Edmund.com's Caldwell. But then, the GM trucks are already out.
The F-150 makeover will require an unusually long, 11-week shutdown at
Ford's main pickup plant in Dearborn, Mich. Some analysts have compared it with
Boeing's launch of the lightweight Dreamliner, noting that potential is high
both for long-term profits and near-term production hiccups. Ford Chief
Financial Officer Bob Shanks counters that the company has already used aluminum
bodies successfully in Jaguar XJ luxury sedans and Range Rover sport-utility
vehicles, brands it sold in 2008. "We've done a lot of testing, preparation, and
training to make sure we can pull this off," he told Barron's last week.
The stakes are high because pickups bring in well over half of North
American profits for both companies. A production problem for Ford would likely
cause its shares to slip and those of GM to gain. But even with a smooth F-150
rollout, earnings per share for Ford are expected to decline to $1.40 this
year from $ 1.62 last year. One reason is that all of those model launches
bring costs and production pauses that cut into margins, and leave Ford with
lots of old models to clear out. Another is that the dollar has gained more than
30% versus the Japanese yen over the past two years, giving Honda and Toyota a
pricing advantage against both U.S. companies. By next year, as Ford reaps the
benefits of its 2014 launches, earnings per share are expected to swell to
$1.94. That puts its shares at 11 times this year's earnings forecast, but
only eight times next year's.
GM's profits per share, meanwhile, are expected to climb 25%, to $4.21
this year, and rise another 24%, to $5.20, next year. That puts its shares at
nine times this year's estimated earnings and seven times next year's. In
January, the company reinitiated a dividend payment, adding to the stock's
appeal. GM may also be more likely to pursue share repurchases. It exited U.S.
government ownership in December.
With U.S. car sales once again approaching peak levels, growth will likely
slow from here, but Western Europe has barely begun to recover. Just 11.5
million light vehicles were sold there last year, down from 13.7 million in
2009. Both GM and Ford are posting sizable losses in Europe, but both expect to
break even there, beginning in 2015.
Ford has made more progress on its pensions, notes RBC's Spak, having
reduced its shortfall to $9 billion, from $18.7 billion last year. GM, which
won't report pension results until Thursday, started last year with a $27.8
Ultimately, Ford and GM should attract more stock buyers as they continue
to drive down costs and improve their ability to steer well clear of financial
distress during the next downturn. Wall Street's average price target of nearly
$48 for GM implies more than 30% upside, which seems reasonable.
At that price a year from now, the shares would go for nine times the 2015
earnings forecast, still a significant discount to the market. That multiple
would acknowledge the cyclicality of the business, but no longer be a basket-
case valuation. Ford's average target of $18 implies a 20% gain and would
leave it, too, at nine times 2015 earnings. That seems conservative, but then,
it's a riskier year for Ford.