Trump’s EPA Policies Could Help Ford Motor Company (F) and General Motors Company (GM)

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Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) are in a much better place than they were during the financial crisis. GM stock, of course, went to zero as GM filed for bankruptcy in 2009. Ford stock performed almost as badly. It hit an all-time inflation-adjusted low in 2008, trading just above $1 before recovering.

Trump's EPA Policies Could Help Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM)

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The narrative around the Ford and General Motors troubles largely centers on union wages and pension obligations. Those labor costs left the U.S. giants unable to compete with foreign manufacturers. That narrative usually omits another key factor, however.

Environmental regulations, notably CAFE (Corporate Average Fuel Economy) standards, had a major role as well. Ford and GM simply never figured out how to profitably make smaller cars (with those labor costs a key reason why). But fuel economy rules required Ford and General Motors to make those smaller cars — at a loss — in order to sell profitable trucks and SUVs.

With the Donald Trump Administration reportedly reconsidering environmental regulation on the industry, there have been hopes that GM stock and Ford stock could benefit from changes. And there is some logic behind those hopes.

Where Ford Stock and GM Stock Sit Now

Obviously, it’s not the financial crisis anymore. GM stock has been recapitalized and returned to the public markets. Ford stock hasn’t exactly soared since a post-crisis rebound, but it has been steady, and both stocks have paid substantial dividends along the way.

Chrysler — which also went bankrupt in 2009 — has become part of Fiat Chrysler Automobiles NV (NYSE:FCAU), a stock that has roared since the election.

But FCAU aside — and that stock hasn’t had huge upside on a long-term basis — automotive stocks haven’t performed all that well. And the small car problem persists — and now extends to electric cars. GM reportedly loses $9,000 per car on sales of its Chevrolet Bolt EV. Fiat’s 500e sells at a $14,000 loss. Tax credits may offset some of the impact, and higher production and scale could improve margins eventually. But the drag from CAFE and other standards continues for U.S. manufacturers.

Unsurprisingly, both Ford and GM trade at very low earnings multiples. GM stock trades at about 6x earnings. Ford stock is valued at just over 7x its estimated 2017 profit.

Short-term concerns about peak U.S. auto sales — after the post-crisis rebound — are one driver. Longer-term concerns about self-driving cars — which would noticeably limit demand — are another. But in those earnings is embedded an indirect tax paid by owners of Ford stock and GM stock for fuel-economy standards. And lately, it seems possible those standards might change.

Trump’s Review and Its Impact on Ford and General Motors

There are two possible changes that have come to light in the last week. The more well-covered was when President Trump himself said last week that the government would review ‘mid-term’ fuel economy standards, required to be met from 2022 to 2025. According to Business Insider, automotive industry representatives, as well as GM CEO Mary Barra and Ford CEO Mark Fields, have pushed back against the higher standards required.

Whatever the impact on an environmental or social basis, a reduction in those standards would be good news for both F stock and GM stock.

To be sure, such a move isn’t guaranteed. But the new head of the EPA, Scott Pruitt, is a notable skeptic toward climate change. Meanwhile, Trump Administration priorities seem skewed toward jobs. If the Big Three can make the case that a rollback of those standards would help sales — and protect U.S. jobs – they will find a willing audience. The ability to sell more larger — and more profitable — cars could help earnings in the next decade.

Before that, it would improve sentiment toward Ford and GM stock.

California’s Waiver

The second potential catalyst is a bit more hidden. Under the original Clean Air Act, the state of California was granted a waiver from federal legislation. That state can — and does — require far more stringent regulations on tailpipe pollution. Other states are allowed to follow as well.

Those regulations — originally designed to target smog — add cost to every vehicle sold under California standards. And the state now is pushing for faster adoption of electric cars. That would force Ford, General Motors, and other manufacturers to sell more unprofitable electric cars to allow for profitable sales of trucks and SUVs.

That waiver may be at risk, however. Pruitt reportedly is looking for a way to withdraw that waiver. And that would be a substantial game-changer for both F stock and GM stock. It would remove the additional cost of making two versions of each vehicle for U.S. markets. It would mitigate electric car risk. Both factors likely would improve margins — and profits — for both Ford and General Motors.

Again, the environmental and social impacts of these discussions is up for debate. But from an investment perspective, both F and GM look extremely cheap — and pricing in a number of risks.

It’s worth considering what might happen if one of those risks was removed, or at least mitigated for the time being. With both Ford and General Motors at single-digit multiples, it’s hard to imagine the stocks, in that scenario, would go anywhere but up.

As of this writing, Vince Martin had no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/ford-motor-company-f-stock-general-motors-company-gm-stock-epa/.

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