General Motors (GM) shares have spiked since the company announced last week that it would repurchase 200 million shares from the U.S. Treasury for $27.50 per share. The Treasury Department intends to sell the rest of its stake (approximately 300 million shares) on the open market over the next 15 months. The end of the "government overhang" has sent GM shares to a new 52-week high, just short of $28: up nearly 50% from this summer's lows.
However, Ford (F) shares appear much more attractive at this time, particularly after the recent spike in the GM share price. That said, I am moving to a more cautious view of the auto sector as a whole, given the recent rally in auto shares and the potential impact of the fiscal cliff. While I still believe in the long-term story at General Motors, GM seems particularly vulnerable in the short term because of its high U.S. truck inventories. If consumer uncertainty leads to a slowdown in truck sales in early 2013 (a very plausible scenario), high inventories of 2013 models will damage the launch of GM's re-designed 2014 model year trucks. GM will either have to add weeks (or months!) of unplanned downtime at truck factories, or else increase incentives on 2013 trucks to clear inventory. This could put the average analyst estimate for 2013 EPS of $3.84 at risk. (I expect the accretive effect of GM's share buyback to be offset by an increase in the non-cash tax rate due to a reversal of the company's valuation allowance.)
By contrast, Ford appears to be sailing along in the U.S., despite a rash of recalls this year. The redesigned Fusion mid-size car and Escape SUV have been hits in the critical U.S. market as I projected, although sales have been constrained by low supply. Ford's F-series pickups have also sold very well this year, with the last four months each coming in above 50,000 units. These strong sales trends have helped Ford reach record margins in North America. As a result, Ford's management is increasing the production plan for next quarter, which should also help profitability by leveraging fixed costs. If macroeconomic problems affect the auto market, Ford is in much better position than GM to maintain lean inventories by trimming production.
Ford's overseas trends also look better than GM's at this point in time. GM has a much stronger position in China (the world's largest auto market), but as a result it has to work hard just to maintain its current market share. Both companies have benefited significantly from the recent geopolitical dispute between China and Japan. Major Japanese automakers like Honda (HMC), Nissan (NSANF.PK), and Toyota (TM) have seen sales slump in recent months as nationalism has led some Chinese consumers to shun Japanese products. As I wrote earlier, Ford will be the bigger beneficiary, because it is in the midst of expanding its product portfolio and doubling its production capacity in China. Without the opening provided by the China-Japan dispute, I think Ford would have had trouble increasing its sales at such a rapid pace. Instead, Ford has broken sales records for three consecutive months in China, taking advantage of the Japanese automakers' weakness. Most importantly, while Japanese automakers saw sales improve sequentially in November, Ford still posted 56% sales growth year over year.
Meanwhile, in Europe, the consensus is that Ford has a much more credible restructuring plan than GM. Ford will close two small plants in the U.K. and a somewhat larger plant in Belgium in order to concentrate production in a few "mega-plants" and achieve better economies of scale in Europe. These cuts will take place over the next two years, which should enable a return to profitability by 2015, whereas GM will be hard pressed just to reach its goal of breakeven by then (GM does not plan to close any plants until 2017).
Like GM, Ford could hit a rough patch next year if the U.S. goes off the "fiscal cliff". With shares up nearly 40% since early August, I would consider waiting for a pullback before buying Ford stock. On the other hand, based on its credible European turnaround plan, growth in China, and continued strength in the U.S., Ford is still a good long-term bet. The company's relaunch of the upscale Lincoln brand with a better product portfolio provides additional upside over the next few years. With Ford trading at 8.5X forward earnings, and upward revisions to those estimates likely based on recent trends in the U.S. and China, the current share price is still quite reasonable. GM is more speculative at this point, as the launch of the new truck models is clouded by the inventory overhang, and a return to profitability in Europe seems as far-off as ever. In light of the similar multiples, the recent GM hoopla seems unwarranted. Ford looks like a much more attractive investment for 2013.
Additional disclosure: I have sold $12.50 January calls against my position in F.