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 thisyear , judging by Marchsales 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 aninvestment 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
, 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
General Motors Co. (NYSE:
Still, if you had to choose just one, which one would it be?
I did a similar analysis
back in August 2011
and gave a slight edge to Ford. Since then, Ford and GM have
postedgains 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 themarket , than
they did back then.
Although Ford emerged from therecession 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 vehicleswill be upgraded in the next 12
months, which is the highest percentage in the industry, according
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 buildmarket share in that
region, but the benefits of that investment are probably several
Ford's areas ofrelative 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
- A path to sharply reduced losses in the troubled European
market: Ford could reach abreak-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
- 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 shouldnote are two measures of
organizational efficiency. In terms ofearnings before
interest,taxes ,depreciation andamortization (EBITDA ) margins and
return on investedcapital , Ford remains the far stronger
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
offree cash flow . That's why Ford is now paying adividend 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
itsdebt load by roughly $20 billion during the past few years.
Will GM eventually focus on dividends and share buybacks? With
"several years of strongcash flow ahead, there is excessliquidity
that we expect will ultimately make its way to shareholders," said
To be sure, GM's $21 billion netcash position is more impressive
than Ford's $10 billion. But Ford'spension 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 itseconomy 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 impressiveturnaround , GM would be garnering more buzz. Still,
Ford continues to carry the torch in this industry with its
superior set of management decisions. Althoughshares of GM may look
like a slightly better value, it's wise to stay with Ford, the
-- David Sterman
P.S. -- Since we began publishing our annual Top 10 Stocks
report in 2003, our picks have beaten the market seven out of the
past nine years -- including average annual gains of up to 38.7% in
a single year. Go here to learn more about this year's report.
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of F in one or more of its "real money" portfolios.
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