Despite the fact that most of the major car manufacturers have already posted third-quarter results, there’s still not a lot of clarity regarding who’s doing well, why they’re doing how they’re doing, and how well they’re apt to do in the future.
In other words, the auto industry’s outlook is a mess right now.
Good news for undecided investors, though: You can compare and contrast the two biggest publicly traded names in American automobiles — Ford (NYSE:F) and General Motors (NYSE:GM) — you just need the right framework to break them down into manageable pieces.
If there’s a recession unfurling in the United States, somebody might want to tell carbuyers. Had it not been for Europe’s woes, Ford might have turned in its best Q3 ever thanks to strength from the North American market. Income of $1.63 billion would have been $2.1 billion had it not been for a $468 million loss stemming from its struggling European operation. Still, income of 40 cents per share topped expectations of 30 cents, and rolled in better than the year-ago figure of 34 cents.
General Motors performed well too, earning $1.48 billion thanks to — like Ford — surprising strength from the North American market. Also like Ford, GM could have produced a bottom line somewhere around $1.96 billion had it not been for the $478 million loss it took because of Europe’s plight.
Though stronger sales and profits from the U.S. market more than offset losses in Europe, GM’s North American profit still fell from $2.2 billion in the third quarter of last year to $1.8 billion this year. Ford, on the other hand, actually saw record profits from its North American operation.
While North American sales were encouraging — particularly for Ford — European woes for both major American car manufactures have been at distasteful levels (i.e. heavy losses) for six straight quarters now. Worse, there’s no real end in sight. The two companies aren’t necessarily in the same European boat, though.
Sadly, there’s no “winning” in Europe for the foreseeable future. There’s only “losing less than the other guy.”
To that end, Ford is well ahead of General Motors in cutting its European losses by closing as many facilities as possible. Ford announced it was pulling the plug on three more European facilities along with last quarter’s numbers, though it has been planning the contraction of its European business since early this year — a prudent (even if painful) move.
GM, on the flipside, is talking about shutting down some European facilities from one side of its mouth, yet talking about joint ventures with European manufacturers like Peugeot from the other.
So what? Though planned plant closures could cost Ford $1.1 billion, at least it will be done and the company can move on. General Motors might need to spend a similar amount to close some of its unprofitable plants in Europe, but has been hesitant to do so; for some reason, it’s feeling more than its fair share of political pressure. Still, one doesn’t get the sense that GM wants to scale back in Europe. That lost cause will simply bleed money until the company changes its mind.
The unexpected wrench in Q3’s numbers came from China, which inherently brings Toyota (NYSE:TM) and Honda (NYSE:HMC) into the equation.
As much as is obvious about Chinese consumerism, there’s just as much that isn’t obvious. One of those quirks is that Chinese consumers love American cars, even more so than Japanese cars. In fact, GM sells more cars in China than it does anywhere else. It’s the biggest carmaker in China by market share (15%), and the country accounts for more than a third of General Motors’ profits. So, as China goes, so goes GM.
Ford is a relatively big deal in China as well, though its market share is only about 20% of that enjoyed by General Motors, or roughly 3% of the total Chinese market.
If China really is hitting an economic wall harder than the U.S. is, or as hard as Europe did, GM is going to feel it more than anyone else. So far, worries of China’s slowdown have been just that — worries — but where there’s smoke, there could be fire.
Great … but what’s that got to do with Toyota and Honda?
Both are relatively big names in the Chinese auto market too, and compete with General Motors on that front. But things are getting complicated.
A recently developed row over a small island in the East China Sea has soured Chinese consumers on Japanese carmakers … enough to make the Chinese stop buying Hondas and Toyotas. It matters, because China is now the biggest auto market in the world. If both major Japanese manufacturers are out of the way, GM could widen its lead there.
Though the spat didn’t impact third quarter’s results too much, it will impact Q4’s numbers — and all future results as well — until the argument is over. That could be years.
Advantage: General Motors — at least until further notice.
And the Winner Is …
That’s a lot to work through, and don’t think for a minute that just because Ford is healthier on two fronts, GM’s one strength — China — couldn’t more than offset those.
However, Ford seems to be dealing with fewer “ifs” on the international front, and at the very least you know you won’t have to contend with a strong selloff if and when the U.S. government sells its 33% stake in General Motors. Plus, Ford shares are priced lower than GM’s on a forward-looking basis.
As a whole, if you’ve only got room for one in your portfolio, Ford’s the name to own right now.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.