Some worries about the economy are definitely rational, as the continuation of deleveraging has definitely crimped growth. GDP has declined to near zero levels, inflation has picked up a bit, and we've lost confidence in our policymakers to do the right thing. The reality is, however, we've been through this before, and we'll come out of it again. How long that will take, I'm not sure, but investors shouldn't wait for things to become rosy before dipping a few toes in to the market.
The auto industry has certainly benefited from a combination of low interest rates and an uptick in consumer spending over the last couple of years. Ford (F) and General Motors (GM) have been the main U.S. beneficiaries of a better market. At the end of 2010, Ford had improved net income by more than $21 billion since 2008. GM also improved their operating profits by $26 billion. Better yet, both companies were able to significantly improve their balance sheets by way of some serious deleveraging. Per their annual report, Ford reduced their automotive debt by 43%, or $14.5 billion. GM, on the other hand, reduced their automotive debt to $4.6 billion, down from $15.8 billion.
In the United States, the current market share lines up as follows
- GM - 19.6%
- Ford - 16.2%
- Toyota - 14.1%
- Honda - 10.3%
- Chrysler - 9.6%
- Nissan - 8.5%
In China, GM holds 10% of the passenger vehicle market, while Ford holds 2.7%.
While both companies have several similarities, their respective businesses and share prices are positioned very differently for the future.
Ford's new emphasis on small, fuel-efficient, quality vehicles was much needed. The Fiesta, Focus, and Fusion are all capable of 40 mpg. All three have been well received, and the Focus has been a top seller for years. Ford experienced overwhelming, unexpected demand for their Focus and Fiesta models, which was extremely positive.
Ford has a net-asset-value of $6 billion, while their market cap is $38 billion. While this alone has them trading at more than six times net tangible assets, their quarter to quarter improvements have been drastic over the last two years. The gap between their NAV and their market cap is closing rapidly. Ford has zero goodwill on their balance sheet, and Ford's shares have no government ownership.
Ford's Lincoln brand has improved, and they own 6% of the premium car market. Lincoln was awarded first in the 2011 AutoPacific Vehicle Satisfaction Award program, a surprise to many in the industry.
Bob King, president of the United Auto Workers union, was outspoken about the bonus and compensation taken by Ford's CEO, Alan Mullaly.
GM has a significantly more diverse pipeline than Ford. The Eco Cruze can achieve 42 mpg, while the Equionox Crossover (the leader in sales for its segment) gets 32 miles to the gallon -- very impressive considering its size. The GMC terrain, a very large car, can also get 32 mpg, which is exceptional considering its size and function. GM's Volt offers a compelling opportunity in the EV market going forward.
GM is the leader in market share for the U.S., has a massive share in China, and owns 8.8% of European market share. While a significant slowdown in China would greatly harm both Ford and GM, GM's highest production volume and revenues are in China. GM also owns a piece of the Brazilian market, which is the fifth largest automobile market in the world.
GM has only $4.6 billion in automotive debt. Per their annual report, GM cannot pay dividends on their common stock until all accrued dividends on their preferred stock are paid.
GM is immune to action from the UAW regarding their September 14th deadline for a new contract; this is on terms of GM's government bailout.
GM has a ridiculous $31 billion in goodwill. This goodwill has been highly criticized, as future writeoffs are nearly inevitable as their credit improves. When goodwill is stripped out, GM actually has a negative asset value. Plus, the U.S. and Canadian governments still need to unload the rest of their stakes, leading to serious future dilution.
GM is the clear leader in pipeline diversity and production capacity. Their small cars are leaders in fuel efficiency, and have been on the market for a few years now, while Ford has just recently made a real effort to make small cars their main production. Unfortunately for GM, strange accounting and government ownership make Ford look like the better play on the auto industry. While success in both companies' share prices will likely go hand in hand, Ford appears to have the upper hand on long-term outperformance.