Ford (F) announced its third quarter 2013 results last Thursday, October 24th, and reported an excellent quarter based on the following factors:
- EPS of $0.45 compared to analyst estimates of $0.38, maintaining its track record of positive earnings surprises for every quarter this year.
- Increases in volume of sales by 16% and corresponding increase in the market share to 15.8% (note chart below ends at August).
- An improved outlook for the rest of the year.
Ford's excellent results, however only sent the company's shares up around 2% the morning of the announcement and the stock closed out the week slightly higher than the pre-announcement level at $17.60.
So the question remains - how does Ford's largest competitor General-Motors (GM), which is due to release earnings on October 30th, stack up against these results? Should we expect a spike in share price upon its results announcement on Thursday to match Ford's shares, which it currently has lagged?
Shares of both companies have risen substantially over the prior quarter, and it seems a good deal of this most recent quarter's news was already priced into the shares. Given that there is a good deal of information available on a monthly basis to investors and analysts regarding sales, market share etc, earnings day swings are much less likely in the automotive sector than other industries.
1) Market Share
GM's lead is strongly contested by the spectacular rise of its fiercest competitors Ford and Toyota (TM). Both have made impressive gains in market share in the current year at the expense of GM's share.
The market share is not a zero-sum game, meaning a loss in market share does not necessarily result in losses for the losing party. The overall light vehicles industry experienced an increase in sales over the prior year of 10.8% up to August 2013, resulting in all three manufacturers benefiting from this rise in varying proportions. As a result, GM's diminishing market share in itself is not enough to cause concern, as it has a smaller piece of a much larger pie.
2) Sales Volume
For the past three months, unit sales of vehicles at the big three manufacturers have varied widely:
While all three experienced regular seasonal declines in September, Toyota and GM's declines exceeded 40%, while Ford's was only 15%.
For the trailing 12 month period ending in September 2013, Toyota and GM both have posted losses in unit sales over the prior year of 4.3% and 11%, respectively. Ford, on the other hand, has posted a gain in these same sales of 5.7%.
Based on the decline in sales volume compared to Ford's spectacular increases, and the shedding market share to Ford, it is evident that GM has not had as spectacular a quarter as Ford.
The markets have given some validation to this, as the GM's shares trail Ford's by 6.75% since the last quarter. However, considering the drop in market share and sales experienced by GM, it seems this disparity does not properly reflect the difference in operations for these two companies over the last quarter. The biggest evidence of this is the higher P/E ratio at which GM trades compared to Ford, which seems to indicate GM is overvalued at its current level compared to its peer.
I do not recommend buying GM shares ahead of the earnings release. Results may not be bad enough to disappoint, but they will most likely not impress anyone.
I do however recommend buying shares of Ford for the following reasons:
- Ford trades at an excellent valuation based on both the P/E and P/S compared to its competitors.
- The increases in sales and market share for the current year have been exceptional. Consumers seem to be very receptive to Ford's new models.
- The continued outlook for the U.S. vehicle sales remains upbeat, and with its increased market share, Ford will continue to benefit from this in greater proportion.
Other factors to consider
1) One of the three major rating agencies raised GM's corporate debt rating to investment grade from junk status in September of the current year. Moody's is currently the only one to carry such a rating, S&P and Fitch still maintain the junk rating. This is a positive development for GM as more institutional investors will consider the company's debt, which will bring down the cost of borrowing
2) Though it is incredibly difficult to determine, there will likely be an effect of the U.S. government shutdown on the sales of vehicles. It is unlikely that one manufacturer will be affected more than others, however a weakness in October sales could present a buying opportunity as we enter November. Look for sales information for October to be released on this site.
Disclaimer: I am long GM, F. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long GM through a retirement portfolio I manage. I plan on selling the GM shares Monday and use the proceeds to buy shares of Ford.