Investors Are Still Underestimating GM and Ford

Last week, Ford Motor (NYSE: F) announced another round of cuts to its salaried workforce. Ford is eliminating 7,000 positions -- about 10% of its white-collar workers -- through layoffs and voluntary buyouts, including 900 layoffs implemented in the past few days.

Ford's white-collar layoffs follow close on the heels of a similar program at crosstown rival General Motors (NYSE: GM). Through these job cuts and other initiatives, both automakers expect to generate billions of dollars of annual savings over the next few years.

Nevertheless, GM shares trade for barely more than five times the company's projected 2019 earnings. Ford stock is only slightly pricier at seven times forward earnings. Clearly, investors fear that cyclical factors and secular threats like the rise of ridesharing, electric vehicles, and autonomous vehicles will undermine profit growth efforts at both companies. However, GM and Ford are well positioned to surpass investors' expectations.

Restructuring to become more efficient

General Motors has been working to become leaner for several years. Its most recent cost-cutting initiative was unveiled last fall. GM decided to shutter five plants in North America by the end of 2019, impacting about 6,300 workers. (Many of those employees are transferring to other facilities.) It also cut 15% of its North American salaried workforce, or 8,100 positions.

A Chevy Cruze parked in front of a building

GM is closing a few factories this year in conjunction with discontinuing some models. Image source: General Motors.

Ford has been able to avoid mass layoffs for factory workers in North America by finding new products to replace those it is discontinuing. However, it is following its rival by making big cuts to its white-collar workforce. And in international markets, Ford is well behind the General in terms of addressing recent profitability challenges. The company expects to incur the bulk of an estimated $11 billion in restructuring-related special charges outside the U.S.

These cost-cutting programs are not like the moves made a decade ago as auto demand plunged. Back then, staying alive was the priority, so GM and Ford didn't spare R&D spending and other critical investments from cutbacks. Today, the auto giants may not be making as much money as they would like, but both are solidly profitable. Thus, they are acting from a position of strength.

Both companies highlighted that they made disproportionate cuts at more senior levels. The goal is to speed decision making by eliminating unnecessary layers of bureaucracy. In other words, the current cost cuts should make GM and Ford stronger in the future -- not weaker.

New products in North America will boost profitability

Bears believe that cost savings at GM and Ford won't drop to the bottom line. A cyclical decline in U.S. auto sales, weak demand in foreign markets, and tariff-related cost pressures are all potential headwinds that could weigh on profitability.

However, both automakers are in the midst of major upgrades to their vehicle lineups in North America, where they still generate the majority of their revenue and virtually all of their profit. With lots of fresh products in the most popular market segments, GM and Ford should be able to make more money in North America even with flat or modestly declining sales.

A white Ford Ranger parked next to a cliff

New products will help boost earnings at GM and Ford. Image source: Ford Motor Company.

On the new-vehicle front, General Motors is introducing two new Cadillac luxury models this year, led by the XT6 full-size crossover. It reintroduced the Chevy Blazer at the very end of 2018. It will also relaunch the Chevy Trailblazer nameplate for the 2020 model year to replace the Chevy Trax subcompact crossover. Meanwhile, GM is still fairly early in the process of launching a new generation of its lucrative full-size trucks and SUVs.

If anything, Ford has even more ambitious plans. It recently reintroduced the Ranger midsize pickup in North America, and two new off-road SUVs (the Bronco and another untitled entry) are coming within about a year. It has been steadily revamping the Lincoln product lineup with new crossover models. And all-new versions of three of its highest-volume models -- the F-150, Escape, and Explorer -- are coming for the 2020 model year.

An underappreciated story

Thanks to their aggressive efficiency initiatives and new-product offensives, GM and Ford are well positioned to offset whatever headwinds come their way over the next two to three years.

There will undoubtedly be some setbacks along the way. The ongoing trade war with China could exacerbate recent weakness there that has hurt both automakers. The U.S. economy could slip into recession at some point. And the potential impact of a tariff on auto imports to the U.S. from overseas is hard to judge in advance.

On the other hand, the U.S. just agreed to end tariffs on steel and aluminum imported from Canada and Mexico. That could accelerate recent declines in the prices of both key metals, providing some commodity price relief for U.S. automakers.

Considering how cheap shares of GM and Ford are right now, there seems to be far more upside than downside for investors over the next few years.

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Adam Levine-Weinberg owns shares of Ford and General Motors. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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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