The auto sector has posted strong gains in recent months and since Ford (F) and General Motors (GM) are two of the most popular stocks in this industry, it makes sense to review a number of factors in order to determine which stock might be a better value right now. A balanced look at the pros and cons can help investors decide which stock is the better buy:
Management: Both companies seem to have solid management teams in place now. However, General Motors has seen more turnover when it comes to some top management positions. By contrast, Ford has Alan Mullaly as CEO. He came to this position from Boeing (BA) and he helped guide Ford through major challenges without the need for government bailouts. During his tenure, Ford has strengthened the balance sheet and initiated a dividend. (Ford now pays a 40 cent per share dividend which yields about 3%, whereas GM pays no dividend.) Because of these points, I would have to give the management (and dividend) edge to Ford.
Government Ownership: General Motors received financial assistance from the U.S. Government during the financial crisis. As a result of this, the government owns a substantial amount of GM stock. This ownership has been a concern for some investors because the government plans to sell this position and it has been doing just that. A recent report states that the U.S. Government sold about 18 million GM shares which was equivalent to about $489.9 million. This follows up on other stock sales which started in January, 2013. The government plans to sell its stake in GM by early 2014, so this stock sale "overhang" could persist for awhile.
In the short term, the government ownership appears to be a negative for GM, so Ford wins here. However, in the long-term, the government-owned position will be liquidated and once this overhang is lifted, it will be a positive catalyst for GM. Investors and consumers are likely to view GM more positively once it eliminates the perception that it continues to rely on a "crutch" from the government.
Product Line: Due to the number of model re-designs that GM has planned, I think it has the edge in the next couple of years when it comes to the product line.
General Motors has a few legendary models including the Corvette and Camaro. It also has Cadillac in the luxury segment. GM is planning to introduce the Chevrolet SS and the Cadillac ELR in 2014. The Buick Grand National and GNX models are scheduled for 2015. A re-designed version of the Chevrolet Camaro should be out in 2016.
Ford has popular models like the Mustang and in the luxury department it has Lincoln. Ford plans to launch a re-designed Fiesta in 2014 and this popular model is highly fuel-efficient. It will introduce an all-new Mustang for 2015. Ford is trying to boost the Lincoln brand with a marketing campaign which is focused on attracting younger buyers.
European Losses: Many automakers are experiencing serious challenges and even major losses in Europe due to a weak economy and very high unemployment rates. Ford and General Motors have been reporting substantial losses in Europe. Just recently, analysts raised the loss estimates for Ford's European operations to $2.4 billion, which is up from $2.1 billion. Loss estimates for GM's European operations were raised to $1.5 billion which was up from $1.3 billion. This appears to give an edge to GM.
Balance Sheet and Book Value: GM has about $26.12 billion in cash and around $16.05 billion in debt. Ford has about $24.42 billion in cash and around $105 billion in debt. Because of this, GM appears to have the edge. Furthermore, GM's book value is $18.92 and Ford's is $4.07 With GM shares at about $28, it is trading for about a 50% premium to book value. With Ford trading for over $13, it is trading for a more than 300% premium to book value. GM appears to have a stronger balance sheet and it is trading closer to book value which makes it a better buy when compared to Ford in these areas.
Price To Earnings Ratio: Analysts expect Ford to earn $1.39 in 2013 and $1.67 in 2014. That puts the price to earnings ratio at around 10 times. General Motors is expected to earn $3.39 in 2013 and $4.35 in 2014. That indicates a price to earnings ratio of about 8.2 times. This valuation metric shows that GM shares appear to be a better value.
For the past couple of years, I have viewed Ford more favorably (mainly due to the management factor). Both Ford and GM appear to have upside, and while both trade below the average price to earnings ratio of the S&P 500 Index (SPY) which is around 15 times earnings, GM shares seem to offer more value at this time. The valuation gap between these two companies can probably be attributed to the government ownership and once this ends, GM shares may have more upside potential.
Here are some key points for F:
Current share price: $13.43
The 52 week range is $8.82 to $14.30
Earnings estimates for 2013: $1.39 per share
Earnings estimates for 2014: $1.67 per share
Annual dividend: 40 cents per share which yields about 2.9%
Here are some key points for GM:
Current share price: $28.16
The 52 week range is $18.72 to $30.68
Earnings estimates for 2013: $3.39 per share
Earnings estimates for 2014: $4.35 per share
Annual dividend: none
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.