Ford vs. GM — Clash of the Titans Continues

by Jim Woods | May 4, 2012 6:00 am

The lap times are in for automakers, with April sales and first-quarter earnings in the books. What the numbers show is that the titanic battle between Ford (NYSE:F[1]) and General Motors (NYSE:GM[2]) is getting both slower, and tighter.

Let’s first take a look at what we just learned from their recent earnings reports — and then what to expect going forward.

Looking Back

Earlier this week, both companies recorded a downshift in April sales. Ford saw its total sales decline 5% year-over-year for the month. GM saw an even more abrupt slowdown, as its sales sank 8% YOY. In what came as a bit of a surprise to many industry watchers — including yours truly — there was a decrease in demand for the more fuel-efficient compact and subcompact models.

Another surprise to most was the outstanding showing from that “other” U.S.-automaker, Chrysler. The Fiat SpA-owned (PINK:FIATY[3]) firm posted a 20% surge in its April sales, a boost likely due to big rebates on many of its most popular models.

On the earnings front, both companies showed a remarkable lack of horsepower in the first quarter.

Ford’s Q1 results revealed that net income fell by nearly half compared to a year ago, as a higher tax rate and losses in Europe and Asia represented a substantive amount of drag on the company’s results. Ford did lay down a blistering lap in North America, with operating profit in its North American unit rising 16% to $2.1 billion. Ford’s profit margin in the region now is 11.5% — quite impressive when compared to the industry goal of a 5% North American profit margin.

Overall, Ford earnings came in at $1.4 billion, or 35 cents a share, which is down from $2.55 billion, or 61 cents, a year ago. Revenue also declined, sliding 2% to $32.4 billion. Ford’s outlook for full-year operating profit remained unchanged despite the Q1 showing.

As for GM, the automaker saw its first-quarter profit plunge 69% from a year-ago. The world’s largest automaker reported earnings of $1 billion, down from $3.2 billion a year ago. Of course, that year-ago number was juiced by gains from asset sales in Delphi Automotive LLP and Ally Financial. Yet despite the decline in YOY profits, the Q1 figure did best Wall Street’s expectations. GM earnings fell to 93 cents a share from $1.77 a year ago, a figure that topped analyst forecasts for 85 cents.

Like Ford, GM had a difficult time in Europe and Asia but saw strong sales in North America. GM made $1.7 billion in its North American division, a number that easily bested last year’s metric of $1.3 billion. Although North American sales were strong, they did come in slightly below estimates. As for GM’s North American profit margin, the company saw an improvement to 7%, above the industry goal of 5%, but well below Ford’s 11.5% metric.

As for U.S. vehicle sales in the first quarter, GM saw an increase of 2.7% while Ford’s sales rose 8.5%. Here again we see Chrysler trouncing its competition, as its U.S. sales surged 35.9% in the quarter.

The first-quarter results, along with the April sales data, show that both Ford and GM have put on the brakes since last year. And though both companies are enjoying the rebound in North American sales, both also are suffering the ill effects of a slowdown in Europe and Asia.

Looking Ahead

The question here for investors is which — if any — of the two auto giants deserve your attention?

From a technical perspective, both Ford and GM have seen a major deceleration in their respective share prices. Ford shares are down 13.2% during the past three months (through May 2) while GM shares are just fractionally better, down 12.4% over the same period. Both stocks recently skidded below their respective 200-day moving averages, a clear sign that investors are getting out of the driver’s seat in both stocks.

Some value-oriented investors I’ve spoken with of late think the recent decline in both Ford and GM makes them a screaming buy at current levels. They cite Ford’s very low P/E ratio of just 2.21, as well as its dividend yield of 1.7%, as a reason to buy the stock now. GM doesn’t pay a dividend, but it too trades at a low P/E of only 4.98. To be certain, you are getting a lot for your money with both of these stocks right here, but valuation alone isn’t a reason to get back in either stock.

What could be the bigger reason to own one or both of these stocks is the growth of their respective presences in China.

GM already is the No. 1 foreign automaker in China in terms of sales, and recently the company announced plans to increase its number of dealerships in the country by 20%[4] this year. That would bring GM’s dealer network in China to 3,500 stores, up from 2,900 at the end of 2011. By comparison, the company’s U.S. network of dealerships totals 4,400. GM also plans to build additional factories in China, and it is looking to expand its Cadillac luxury brand in the country.

Ford also is broadening its Chinese footprint, as the company just announced plans to build its fifth car factory in eastern China as part of a plan to double its production capacity and sales outlets in the country by 2015. When the expansion is complete, Ford will says it will be capable of building 1.2 million passenger cars a year in China — nearly half the number it built last year in North America.

If you are an investor willing to fasten your seatbelt on both Ford and GM shares for the next several months or more, your patience could be rewarded handsomely by building a position in either stock at current levels. However, if you are looking for a trade, I’d wait for the bears to get exhausted — and for the stocks to take their respective drives back above the 200-day average — before getting behind the wheel.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

Endnotes:
  1. F: http://studio-5.financialcontent.com/investplace/quote?Symbol=F
  2. GM: http://studio-5.financialcontent.com/investplace/quote?Symbol=GM
  3. FIATY: http://studio-5.financialcontent.com/investplace/quote?Symbol=FIATY
  4. increase its number of dealerships in the country by 20%: http://investorplace.com/2012/04/detroits-big-showing-at-beijings-auto-show/

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