Handicapping Ford vs. GM Now

Both stocks have fallen lately in tandem, but one will rebound more

   

It’s been one year since General Motors (NYSE:GM), one of the most legendary of U.S. stocks, started trading again after the carmaker, one of the most legendary of U.S. businesses, came out of bankruptcy. Things started well enough, with the stock opening for trading at $35 on Nov. 18, 2010. It nudged higher in the following weeks and was up over $39 in early January, but it’s been downhill ever since.

Over the past 12 months, GM is down 39%. By comparison, Ford (NYSE:F), the second-largest U.S. automaker is down … 39%. That’s right, the stocks have been almost identical twins in the past year.

The first question investors should ask is whether both stocks are in trouble and should be avoided, or whether the long slide is now giving us a good buying opportunity. We all like to “buy low,” but only if we’ll be able to “sell high.”

My answer: opportunity. I view both GM and Ford as what I call “fallen angels” — companies that were once considered blue-chip or growth darlings that have fallen out of favor with Wall Street and investors but are on the verge of again flying higher. I say that for three main reasons:

Better quality = better image. Both automakers got serious after some very difficult times about doing what they should have been doing all along: producing quality cars that American consumers will pay for. Ford’s Fusion and GM’s Chevy Malibu each sold nearly 200,000 cars last year, making them the most popular American-made family sedans. They’re still outsold by Toyota Camrys and Honda Accords, but the gap is closing, and I expect it to narrow even more over time.

And don’t forget trucks. Ford’s F-150 and Chevy’s Silverado remain the most popular pickup trucks in the U.S. Nearly 400,000 F-150s were sold last year, as were almost 290,000 Silverados.

Competitive labor costs. GM and Ford also fell on hard times in part because of high labor costs, which ate into profits and put the companies at a big disadvantage to foreign carmakers with much cheaper labor. Both recently negotiated new contracts with the United Auto Workers union that are much more competitive, roughly 30% below what they were paying before the financial crisis. (Ford also agreed as part of its contract to repatriate jobs in Mexico back to the U.S.)

The stocks are cheap. Ford sells for just 6.6 times 2012 earnings estimates, and GM is even cheaper at 5 times 2012 estimates. That means both offer solid upside potential as well as lower downside risk, which is important given the crisis in Europe and slow global growth right now. Both companies could cut their earnings estimates if conditions weaken further and their stock prices would likely remain pretty firm.

And the Winner Is…

With both stocks now at attractive entry points, the next question is whether the two will rise together just as they fell, or do important differences favor one over the other? My answer: Go with Ford.

I really like Ford’s vision of the future and the ambitious program it has undertaken to get there. The company realizes how important energy savings will be, so it has focused efforts on becoming profitable in smaller cars. CEO Alan Mulally and his management team also understand the economy’s global nature, so it is focusing more on emerging markets than GM. These are long-term trends that may not show up quarter to quarter, but they should pay off nicely in the future.

Ford also doesn’t have the stigma of being bailed out by the federal government. I realize that was a while ago for GM, but perceptions are important in investing, and the fact that Ford was able to survive without a bailout brings it some respect in the market. The perception has fiscal reality as well because Ford has net automotive sector cash (which excludes the finance subsidiaries) of over $30 billion.

And while we’re digging into the finances, let me say I like Ford’s flexible cost structure. The problem with auto companies historically is that they bleed a good bit of cash when times go bad. Ford has tried to limit the impact of downturns by working hard to lower breakeven points across many of its businesses. Again, that’s important in the current environment, and I believe it will ultimately lead to a higher valuation.

So one year after GM’s IPO, let’s give kudos to both companies for their comebacks after the mistakes of previous years and the devastating financial crisis. I expect both stocks to move higher over time, and I look for F to outperform GM. I have a $20 target on F, just about a double from current prices. There’s also an excellent chance Ford will announce a dividend soon, which will make it even more attractive.

As of this writing, Hilary Kramer owns Ford.


Article printed from InvestorPlace Media, http://investorplace.com/2011/11/handicapping-ford-vs-gm-now/.

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