Ford & GM Are Smokin’ on Accelerating Sales

A critical pillar of the investment thesis on auto stocks for years now has been the existence of huge pent-up demand. Thankfully, the latest monthly sales figures show that drivers are finally giving up their clunkers for new cars — making shares of Ford Motor (NYSE:F) and General Motors (NYSE:GM) worth a closer inspection.

The grindingly slow pace of the recovery and continued high unemployment have Americans driving their cars longer than ever. Indeed, folks are holding on to their new cars and passenger trucks for record lengths of time, according to data from market researcher R.L. Polk & Co. The average age of passenger cars now on the road stands at more than 11 years. In 1995 that figure was just 8.4 years.

So it’s no wonder that overall industry new-vehicle sales have topped an annual sales rate of 14 million for two months in a row — and just hit their highest level in four years. Ford said February sales rose 14%, while GM posted a 1.1% gain. Chrysler, now controlled by Italy’s Fiat, enjoyed a whopping 41% jump.

Results were similarly strong for non-U.S. automakers as aging fleets and fuel-conscious consumers more than offset the turn-off of rising gas prices. Toyota Motor (NYSE:TM) saw sales rise 12.4% in February. Nissan Motor (PINK:NSANY) said sales grew 15.5%, while Kia Motors gained 37.3%. Volkswagen (PINK:VLKAY) was up 42.5%.

The Big Three were selling an average of nearly 17 million vehicles a year in the decade up to 2007. Last year, U.S. vehicle sales didn’t quite hit 13 million, but now they’re once again gaining steam. R.L. Polk forecasts U.S. sales to reclaim pre-recession levels of about 16 million by 2015.

More fuel-efficient models, accelerating sales and canny strategic partnerships make shares of Ford and GM still look attractive even after their recent run-ups.

Notwithstanding GM’s recent announcement that it will suspend production of the electric Chevy Volt to allow demand to catch up with supply, the company is on a roll. GM posted record profits last month, just two years after taxpayers bailed it out. (GM is still 32% owned by the Treasury Department.)

Furthermore, its 7% stake in Peugeot-Citroen looks like the kind of European partnership that has served Chrysler so well. (Recall that most observers scoffed when Fiat took control of the U.S. automaker.)

And even after rallying 14% in the last three months, GM’s valuation still looks compelling. At 5.4, the stock’s forward price-to-earnings (P-E) ratio offers a 25% discount to its own long-term average, according to data from Thomson Reuters. GM’s PEG (price/earnings-to-growth ratio), which measures how fast a stock is rising relative to its growth prospects, trades 35% below its own long-term average.

Meanwhile, analysts’ average price target stands at $34, making the implied upside 38% in the next 12 months or so.

Ford shares also trade at mostly bargain valuations, despite adding 9% in the last three months. The stock trades at a 26% discount to its own five-year average on a forward-earnings basis and a 73% discount by trailing P-E. Only by PEG do shares appear a bit pricey, trading at a sharp premium to their own five-year average.

Analysts’ mean price target stands at $16. Add in the 1.6% yield on the dividend and the implied upside comes to 33%.

U.S. automakers have enjoyed a remarkable turnaround, and both Ford and GM still have a long way to go. Historically, a sharp rise in gas prices has hurt new-vehicle sales. But as David Rosenberg, chief economist and strategist at Gluskin Sheff points out, pent-up demand and more fuel-efficient fleets should help blunt some of the impact of skyrocketing gas prices this time around. If sales can maintain their momentum, shares in Ford and GM should keep accelerating as well.

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