Ford Or GM: Which Is The Better Investment?


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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

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 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 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 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 buildmarket share in that region, but the benefits of that investment are probably several years away.

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 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 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 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 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 Goldman's analysts.

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 industry's pacesetter.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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