General Motors (NYSE:GM) and Ford (NYSE:F) Motor Company have both experienced a large sell-off during the last month. These two companies are among the largest in the industry with a combined market cap of $75.24 billion. I believe that both stocks are significantly undervalued and present a strong possibility for large gains, perhaps even double the current price. I believe this is possible due to increased earnings and strong guidance for both short and long term.
Both companies show large improvements in nearly all categories of both the income statement and balance sheet, yet both trend lower. New fuel efficient vehicles are pushing sales higher and I believe will continue to push sales higher as consumers look for vehicles that can help save money long term. Each of these factors combined is why I believe it is possible that both Ford and General Motors could nearly double by next August 2012.
Both Ford and General Motors have experienced a large amount of loss over the last month, as a result of panic within the market. Both companies have drastically improved earnings along with July sales that show much improvement year over year. The auto market is expected to continue growing as both companies focus on fuel efficient vehicles to counteract high prices at the pump. I believe that both Ford and GM have created products that actually save the consumer money, long term, with the additional miles per gallon of gasoline.
Ford Motor Company recently announced July sales that increased 9% year over year. The company gives credit to its strong Fusion, Focus, and Fiesta sales which all get high miles per gallon of gasoline. During the month of July, the company also recorded record sales of the small utility vehicle the Escape which is economically friendly itself. The company has manufactured several vehicles that save customers money at the pump. As a result, earnings have continued to increase on a regular basis.
The chart above shows revenue, income, and profit margin during the company's last 5 earning reports. During the last 4 quarters, the company has posted higher revenue along with 3 consecutive quarters of increased income. During the most recent earnings report the company announced revenue that increased by more than $450 million with an EPS that more than doubled.
The company's financial progress is obvious and non-debatable. Since 2009 the company's revenue and income have consistently increased with 2011 on track to continue the trend. Those who oppose Ford as a good investment usually have two arguments which revolve around the following:
- The growth will not last and Ford will not withstand the economic crisis long term.
- The company has too much debt which makes it vulnerable to recession.
Ford could potentially face a strike which could slow production. The stock also felt the full effects of the recession in 2008 when the company lost $14.5 billion during the year. Therefore, I understand the reasons in which investors are pessimistic regarding this company and its stock. However, the company understands the economy and how its business plan fits into the economy. The company's decision to focus on fuel efficient vehicles has been successful, which reflect on Ford's earning reports. This decision or change within the company is why I do not believe that Ford will endure another year, such as 2008.
During 2008 gas prices were at all time highs, to begin the year, and consumers were hesitant to buy Ford's vehicles that were not as gas friendly. Today, Ford is well positioned with both the products and its financials. With the company expecting sales to increase 50% by 2015, all investors should be bullish on the company.
The chart above should give investors a sense of relief regarding the company's debt situation. The chart shows that Ford has decreased its total debt each of the last 5 years along with lowering its debt to assets over the last 3 years. This area of concern is a priority for the company as it continues to work hard at correcting the amount of debt on its balance sheet. This includes quarterly progress, in which Ford has lowered its total debt each of the last 5 quarters.
After considering the information above, it makes sense that Ford would be trading near 52 week highs not $0.60 from 52 week lows. However, the stock is among the first to decline when the market trends lower because of its performance during the recession. Especially since so many lost a large portion of their holdings during this time. Therefore, whenever something negative affects the market, the auto industry is among the first to drop lower, regardless of company performance.
I believe that Ford has the potential to double in price during the next 12 months. The sell-off within the market has given investors a prime opportunity to take advantage of Ford's low price. The stock is trading at $10.40 which is very close to its 52 week low. In January the stock created 52 week highs with a price of $18.97 which is near double its current price. I believe it is reasonable to conclude that within the next 12 months it is possible for Ford to reach its previous 52 week high.
Ford has increased earnings, is on pace to outperform 2010, has strong long term guidance, and continues to decrease its debt to assets ratio. Fundamentally the stock has improved but technically the stock has declined. This action proves the price is not based on the company's earnings but rather fear and market psychology. Based on my experience, the psychology of the market works best for short term trades but the fundamentals of a stock always come out on top. The fundamentals are much improved and I believe that as earnings continue to impress, more will become optimistic of Ford and will invest in its stock. This reason alone is why I believe that Ford has a legitimate chance to double from the current price of $10.40 by August 2012.
Ford's largest competitor is General Motors and the two usually trend in similar directions. General Motors has experienced the same fate as Ford's stock seeing a loss of nearly 20% during the last month. Along with Ford, the company released strong July sales with a gain of 6% year over year. The company has experienced success largely because of its operational decision to create vehicles with better fuel efficiency.
The above chart shows the company's last 5 earning reports which demonstrate an upward trend. This includes the most recent earnings report that announced a 19% gain in revenue along with profit that nearly doubled. GM has posted gains in revenue the last two years and is on pace to outperform during 2011.
The stock is trading with a price to earnings under 5.0 as investors have sold, despite strong earnings with solid long term guidance. The reasons for the loss are similar to that of Ford, which includes a pessimistic view of the auto industry and the economy.
The stock is trading at $22.87 after posting moderate gains during last week from its 52 week lows. The stock's 52 week high, $39.48, is near double of its current price and I can find no legitimate reason as to why the stock has reached these levels. I believe it is logical to conclude that GM can reach 52 week highs in the near future, within one year, which would be near double of its current price because of its fundamentals.
The fundamentals are strong and are expected to get stronger. Therefore I expect for investor confidence to increase throughout the next 8 months and for GM to trend higher. The stock trades with a price to earnings under 5, which is rare even for a company the size of GM. During the last month, the stock has lost over $9 billion from its market cap. With no reason for this loss and a P/E that I believe could easily double as earnings increase this stock, creating new 52 week highs should be a modest expectation during the next 12 months.
Disclosure: I am long GM.