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
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
General Motors Co. (
Still, if you had to choose just one, which one would it
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
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 TrueCar.com.)
- 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
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
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
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.
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