Almost half a decade after the Great Recession, the Detroit Three have emerged in their new avatars, helped by the boom in the automobile industry. As the recession fades further, one wonders which automaker between General Motors (GM) and Ford (F) is a winner on the home turf.
Currently, General Motors is perched at the top of the U.S. automobile industry in terms of unit sales, but it must be worried looking at the momentum and success of new models that Ford is churning out.
Ford operates at a 10% margin level in North America while General Motors is still working toward it. Ford stated that the third quarter was the sixth time out of the last seven quarters with an operating margin of 10% or more and operating profit of $2 billion or more in North America. Ford's third-quarter North American pretax profit of $2.3 billion also came in ahead of GM's North American pretax profit of $2.2 billion. So Ford has been leading its competitor in both operating margin and profits in North America.
One of the biggest factors driving Ford's strong profitability has been the growth of its F-Series pickup trucks. F-Series trucks - led by the 2013 Ford F-150 - have enabled Ford to maintain a comfortable lead over General Motors. In addition, Ford is poised to ramp up sales of its midsize Ford Fusion next year as a result of adding a second facility for manufacturing Fusions at the Flat Rock Assembly Plant in late August, thereby increasing Fusion's production capacity by more than 30%.
Depending on how the world's largest auto maker - Toyota - reacts, Ford may be in a position to take the midsize car sales crown, for the first time in nearly two decades from Toyota's Camry. GM would try and close the gap on North American margins and profits with the early 2014 launch of its redesigned heavy-duty trucks and full-size SUVs as they are more profitable than light-duty pickups.
Both auto giants have growth catalysts lined up for 2014 and beyond. GM needs more than that to really close the gap on North American margins and profits. It needs a strategic error from Ford and the Blue Oval seems in no mood to offer that to its rival. Ford, to me, looks to be a better company but if we look at the third-quarter reports of both the giants, it is evident that both can grow as long as the auto boom continues.
In addition, Ford is well-positioned to grow from its overseas markets. For instance, Ford is making some big moves in India where it is rapidly expanding its dealership and service network. Ford presently has around 265 sales and service outlets in 142 cities across India. Going forward, it plans are very ambitious. By 2015, Ford intends to have around 500 sales and service outlets in India. Moreover, it is growing its workforce and expects to increase the employee headcount 50% by next year.
General Motors' position
However, experts are of the opinion that GM has more capacity to expand production in North America, so it would take some time before Ford can catch up with General Motors in terms of unit sales. So, Ford has less wiggle room than General Motors to increase production as demand picks up, and this is one major hurdle for Ford. We have already seen lower capacity hurt Ford as seen by Ford Fusion shortages.
This is evident from October's unit sales figures, where General Motors' 226,402 units sold beat Ford's 191,985 units by quite a margin. This is much in line with last year when in the U.S., GM sold 352,000 more vehicles than Ford. That's an average of more than 29,000 vehicles a month.
However, these numbers do not mean that Ford is lying low in the North American market. In the third quarter, GM's market share slid from 16.9% to 16.7%, while Ford increased its market share from 14.8% to 14.9%. So, Ford is slowly closing in on GM's market share, but it is currently focused on pursuing higher profits than gaining market share.
On the revenue front, Ford has been closing the gap more aggressively, and the momentum of the trailing twelve months carried over to the North American market in third quarter, where Ford's revenue grew 11% to $21.7 billion. In comparison, GM's North American revenue increased just 5% to $23.5 billion. Globally, as well, Ford is aggressively closing in on the world's second-largest automobile maker.
However, both auto giants have been pushing for profits over market share. Ford, under Alan Mulally, has been much disciplined as far as dealer incentives are concerned, and GM's CEO Dan Akerson has taken a similar approach because the automobile rebound has been so robust that automakers and their dealers did not have to do much to boost sales.
General Motors has come a long way since declaring bankruptcy several years ago. CEO Dan Akerson boasted about Consumer Reports magazine naming the 2014 Chevrolet Impala as the best sedan and the Chevy Silverado as the best truck in the U.S. This recognition alone, however, isn't going to be enough to enable GM to get ahead of Ford in terms of profits in the North American region.
GM's goal is to raise its profit margin (earnings before interest and tax) in North America to 10% by 2015, and it made appreciable progress in this regard in the last quarter to boost it by 160 basis points year over year to 9.3%. Akerson, however, sounded a cautious note to analysts and investors when he said that GM expects margin growth in 2014, but investors shouldn't expect a straight path to the 10% target.
But when it comes to the investing decision, Ford is cheaper with a trailing P/E of 10.80 while GM trades at a higher P/E of 17.65. Also, Ford pays a dividend that yields 2.6% per annum. Hence, given the fact that Ford has been challenging GM for the top spot in the domestic market and has been boosting its production capabilities as well, it might make for a better investment. It is cheaper and also pays a dividend, while its fortunes in the Asian market are also looking up. So, in my opinion, investors should tend more toward investing in Ford rather than GM.