Shares in Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) were on fire to start December, as both saw strong gains in November sales and investors suddenly saw how cheap GM and Ford stock are.
The big U.S. brands rose rather than their international competitors because U.S. demand again was dominated by light trucks, with both Ford and GM beating analyst estimates on sales growth. Ford alone sold over 197,000 vehicles during November, with pickup sales growing 14% to 72,000.
Even with gains of nearly 7% in Ford stock and 5% in GM stock, these picks are still incredibly cheap. Ford trades at just 7 times earnings, it’s covering its dividend of 15 cents per share easily with profits, and the yield of 4.7% is higher than any government bond. GM boasts a P/E of slightly more than 4, and a yield of 4.2% is covered four times over by net income.
Can the Love Last?
What everyone asks when there are good auto sales is, can it last?
It is now assumed that, in a world of Trump, which is dedicated to protecting manufacturing and energy jobs, the answer at least for now is that it can. If it can, your investment in General Motors stock today will be covered by earnings before the new President’s term expires in early 2021.
The question becomes whether these companies deserve a higher multiple, and more stock market respect, than they are currently getting.
While Tesla Motors Inc (NASDAQ:TSLA) is marginally profitable and is worth more than half its big auto rivals, and over 7 times its annual sales, Ford is consistently profitable, yet F stock sells for just one-third of its annual sales volume.
Ford and GM also retain the financial strength to go after the heart of Tesla’s strategic advantages, autonomous driving and alternative fuel vehicles.
Ford’s work in alternative fuels was spurred by Obama administration CAFE standards mandating that cars get 60 miles to the gallon by 2025, and light trucks get 50 miles to the gallon. Electric vehicles, which don’t use gasoline, are included in the calculations, making the numbers manageable.
Will Institutions Buy GM and Ford Stock?
While there was more institutional selling of Ford stock than buying during the third quarter, several hedge funds jumped in.
If the balance between buying and selling adjusts to the buy side this quarter, it could cause a run on the stock which, even if it leads to a P/E of just 10, would bring a 40% gain to both Ford and GM stock holders.
When last reported on the companies’ 13-F reports, just 56% of Ford stock was held by institutions, while more than 70% of GM stock was institutionally owned. By way of contrast, over 80% of stock in Google parent Alphabet Inc (NASDAQ:GOOGL) is held by institutions.
Institutions have been reluctant to invest in the automakers because they have seen it as a no-growth area with outdated technology. But autonomous, self-driving cars should be a high-growth market opportunity, and if the automakers continue to seize it as they are presently doing the view of both stocks could shift dramatically in 2017.
On the other hand, this could be a one-off, a knee-jerk reaction to better-than-expected sales news, and the gains could be short-lived if institutional buyers decide that incentives merely stole volume from later sales, and that profitability will be reduced by those incentives, which often include knocked-down prices and interest-free loans. Higher interest rates also could have a dramatic impact on the sector, making such deals unavailable to next year’s buyers.
For now, the automakers are enjoying the one-day stand and hoping it becomes a more permanent relationship.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
