Don’t Underestimate General Motors (GM) and Ford (F)

Automaker stocks are mostly having anywhere from a decent to a great year, and if sales keep surprising to the upside, we should see more outperformance ahead — especially for Ford Motor (F) and General Motors (GM).

general-motors-gm-stockMonthly auto sales were better-than-expected, and that brings an extra shine to the auto industry. After all, May is traditionally the strongest month for car sales. The news was also welcome because of tough year-over-year comparisons and widespread industry weakness in emerging markets.

A sales slowdown in China has become a key headwind for automakers this year and is hitting Ford and GM particularly hard. More longstanding troubles like recalls and legal woes have been weighing on the auto industry for years.

As a result, F and GM stock are the auto industry’s laggards when it comes to share performance. GM is up a decent 4.05% for the year-to-date, beating the S&P 500 by more than a percentage point, but other bets in the sector have done much better. Except for Ford.

F stock is off 1.4% so far this year, a sad performance by any standard, but even worse compared to what every other auto stock is doing. Toyota Motors (TM) has gained nearly 10%, for example. Honda Motors (HMC) is up 17%, and Fiat-Chrysler (FCAU) gained a whopping 40% so far in 2015.

Happily, underperformance on the part of Ford and GM stock is a lucky break for new money as it’s kept valuations under wraps even as bottom lines are looking better.

Accelerating Profits for GM, F

Ford saw sales slip in May, hurt by weakness in China, Russia, South Africa and other emerging markets, but F stock still beat analysts’ expectations by a wide margin. Ford sales fell 1.3% versus a forecast for sales to decline by 4.3%.

GM, the nation’s largest automaker after Ford, saw May sales rise 3% when analysts expecting a drop of 1%.

Ford stock has yet to fully recover from a miserable autumn of 2014, and GM hasn’t exactly covered itself in glory either. Both auto stocks fumbled in 2014 as their profits declined in the best year for car sales since 2006.

Fortunately, the worst looks to be behind both names.  Ford already has a winner on its hands with the F-50 truck, and sales of new lightweight version of the truck have gotten off to brisk start. Additionally, Ford launched nearly two dozen new models over the last 18 months, even as it shrinks the number of vehicle platforms it uses.

These moves and other efforts are expected to boost Ford’s bottom line handsomely. Wall Street sees earnings per share to rise almost 40% to $1.59 this year.

GM, for its part, remains mired in its recall, possibly facing criminal charges. GM stock, however, has even more room to grow than Ford. Analysts see General Motors’ earnings per share rising nearly 50% this year to $4.37.

GM and F are revving up their bottom lines, and the market just doesn’t seem to care. At least not yet, which makes both stocks look like bargains. Ford goes for just 8 times forward earnings but is pegged to have a long-term growth rate of 17% a year. GM trades at 7 times forward earnings despite a long-term growth rate of 18%.

May sales underscored how analysts are underestimating Ford and General Motors, and that appears to have infected their multiples as well.

At some point, however, the market will be forced to reckon with those 40% and 50% gains in EPS this year, and we’ll see GM stock and F stock react accordingly.

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

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