by Dan Burrows | July 24, 2014 12:09 pm
Ford (F) and General Motors (GM) aren’t firing on all cylinders, but their latest earnings revealed strong underlying businesses and — in the case of GM — surprising resilience. But that doesn’t mean Ford and GM stock are equal as investments.
It’s no secret that new vehicles sales are strong. Years of pent-up demand have finally been unleashed, bringing sales back to pre-recession levels. Indeed, June vehicle sales topped 17 million, nearly twice the number of vehicles sold during the depths of the downturn five years ago.
Happily for anyone holding Ford or GM stock, rising sales aren’t entirely attributable to car buyers finally trading in their old vehicles. Indeed, Ford and GM are benefitting from canny investments made in their own products. It’s hard to remember a time when U.S. car markers offered such a wide range of high-quality vehicles.
That’s not to say Ford and GM are without problems (cough, recall). As we said above, neither automaker is firing on all cylinders. Ford and GM stock have carved out different paths this year to reflect their different risk profiles and prospects. Both Ford and GM’s businesses are doing pretty well, but if you had to pick just one stock? Here’s look at some of the pros and cons of Ford and GM stock:
Ford stock got a nice lift in early trading after Ford posted better-than-expected earnings despite a small decline in sales. On an adjusted basis, Ford earnings came to 40 cents per share, vs. analysts’ forecast of 36 cents.
That’s a substantial earnings beat — something the market usually loves — but it wasn’t without some blemishes. On the plus side, Ford posted better-than-expected results in North America and Europe. Indeed, Europe was profitable for Ford for the first time in three years.
Furthermore, Ford lowered costs, which allowed it to post higher earnings even as revenue slipped to $37.4 billion from $37.9 billion a year ago. With better sales in two major regions and lower costs, Ford stock deserves some applause.
On the downside, South America and Asia were disappointing. In South America, Ford suffered a wider-than-expected loss in operating profit. As for Asia, China was a bright spot for Ford — market share hit a record 4.6% — but overall operating profit for the region came up well short of projections.
Ford is doing well and the outlook is fairly bright. Hey, there’s a reason why Ford stock is up 15% this year to outperform the broader market by 7 percentage points. A forward price-to-earnings ratio of 9 makes for an attractive valuation on Ford stock, and the 3% dividend yield isn’t shabby either.
You can’t talk about GM without leading with its seemingly never-ending recall debacle. GM has recalled nearly 30 million vehicles, and the related costs absolutely clobbered the bottom line. For the most recent quarter, GM said net income fell 80% after taking a hit of $1.2 billion in recall charges.
In other bad news, on an adjusted basis, GM earned 58 cents per share, or a penny short of Wall Street estimates, according to a survey by Thomson Reuters. As if that weren’t enough, uncertainty about victim compensation and some regional weakness also weighed on GM stock in early trading.
GM said it set aside $400 million to compensate victims, but that figure could increase by another $200 million. Since the final tally will be decided by an outside compensation expert, those are GM’s best estimates. The actual damage could be worse, and that’s going to continue to tug on GM stock.
In another knock against GM stock, the auto maker isn’t faring as well in regional operating profitability as Ford. North America and China showed ongoing strength, but Europe and South America logged losses.
However, GM’s revenue actually rose slightly, up to $39.6 billion from $39.1 billion a year ago. That’s a big point in GM’s favor, as is the case that monthly sales figures continue to be robust regardless of the recalls.
We’ve argued before that GM stock is a buy. The underlying business is strong and the recall costs have probably been more than baked into the GM stock price. After all, you’re supposed to buy when there’s blood in the streets, and GM has certainly been bloodied.
The punishment doled out to GM stock makes the valuation sure look compelling, fetching 9 times forward earnings. Like Ford stock, that makes GM stock much cheaper than the broader market even though it has stronger growth prospects. You’ve also got to like that 3.3% dividend yield.
At the same, Ford stock also looks pretty good. Shares are cheap, the underlying business is likewise strong, and the dividend of 3% adds some nice kick to the total return.
It’s a tough call, but Ford stock looks like the (slightly) better investment. That’s based almost entirely on recall risk. GM should theoretically have more potential upside because of that risk. Ford stock is less of a gamble.
Stocks are like cars — safety is more important than excitement. That gives Ford stock an edge over GM stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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