Ford And GM Will Significantly Outperform The Volatile Market

Includes: F, GM
by: Brian Nichols

The auto and truck manufacturers industry has been among the worst performing industry of the last year, losing similar value as the money center banks industry, which include companies such as Citigroup (NYSE:C), Bank of America (NYSE:BAC), and large European financial institutions. Below is a chart of the auto and truck manufacturers industry's performance over the last year along with the money center banks and S&P 500. Included will be my opinions regarding the reasons for the fall of the auto industry along with two companies that should rebound from low points.

auto & truck industry money center banks S&P 500
5 day 4.08% 4.05% 5.20%
1 month -4.73% -3.60% 1.80%
3 month -14.60% -16.12% -4.20%
YTD -15.07% -20.28% -4.66%
1 year -18.53% -20.05% -4.67%

The chart above shows how badly the auto industry has performed over the last year, at various points in time. I have chosen to compare the auto industry to the money center banks because of the similarities in trading. However, I understand the money center loss (especially considering the BofA presence along with the European institutions and its operational issues). But I can't seem to find a logical answer for why the auto & truck manufacturer industry would experience the same level of loss, as the financial institutions. If we look at the financial institutions as a whole we can see several problems that would cause the markets to react.

  • In the United States unemployment is a disaster, which means less spending and more people defaulting on loans or not paying their bills.
  • Companies are stuck in the year 2008 and are not investing in growth, but rather saving money and placing emphasis on being conservative.
  • People are not buying homes or purchasing property despite 30-year mortgage rates being at its lowest levels in over 50 years.
  • U.S. debt and Sovereign debt are their highest levels and exposure is at its greatest for financial institutions.
  • The financial market in Europe appears to be falling apart and could directly affect the global financial system that is reliant on each segment to perform.
  • Lack of faith in our political leaders and government has pushed consumer confidence near all time lows.
  • Concerns over the institution's efficiency at raising capital have caused investors to react with extreme measures and strong selling.

These issues, among several others, have contributed to the demise of the financial institutions within the money center banking industry. However, the auto industry is growing despite these economic issues. Auto sales in America continue to improve while the stocks continue to decline. Below is a look at General Motors (NYSE:GM) and Ford Motors (NYSE:F), two of the large companies in the auto and truck manufacturers industry. All numbers on charts below were obtained from each company's monthly filing.

July Sales
Ford Motors 180,865 9%
Escape 66%
Explorer 108%
Fiesta 58%
General Motors 214,915 8%
Equinox 75%
Terrain 67%
August Sales
Ford Motors 175,220 11%
Escape 39%
Explorer 300%
Fiesta 76%
General Motors 218,479 18%
Equinox 58%
Terrain 88%

The percentage on the right side on the chart reflects year-over-year gains with each model. The models above experienced the largest gains year-over-year, but the fastest growing vehicles for each company are the Ford Fusion and the Chevrolet Cruze. These two models, along with the 5 models listed above, have each experienced a large amount of growth over the last two years. I believe the growth can be attributed to both companies' focus on fuel efficient vehicles.

Both Ford and General Motors have placed a high level of emphasis on new designs for these vehicles, high-technology inside the vehicles, and better fuel-efficiency while maintaining performance. The growth of the listed models, along with the best-selling Fusion and Cruze, prove this point to be correct as each model has been significantly modified to produce more miles-per-gallon, and the consumer has responded by purchasing the models at a much higher rate year-over-year.

Unemployment is still high and there are millions more Americans who are underemployed, yet more vehicles are being purchased. In August 2010 unemployment rates were 9.6% compared to 9.1% in August of 2011. Yet even with unemployment numbers improving the economy as a whole is still very skeptical regarding the future. But the automobile numbers consistently increase, by large margins, which lead me to believe that people are viewing fuel-efficient vehicles as a necessity while fuel prices continue to rise.

It doesn't make sense for these two companies to be trading so close to 52 week lows. With increased sales from both companies, along with strong earnings, despite a rough economy, I must conclude that sales will only get better. The economy will continue to improve, regardless of speed, and new car sales should continue to benefit. For some consumers, it's been a long time since they purchased a new vehicle, because people were not buying during the recession. Therefore, as people obtain employment it will be a top priority to purchase a new vehicle, and since both Ford and GM have capitalized on the consumers demand for fuel-efficient vehicles, I believe it's a difficult case to argue that either of these two companies will not continue to increase sales. And since a company's success is judged by its ability to sell vehicles, stock's performance will only improve.

I do not believe the falling stock prices are related to either of these two companies themselves. It's related to consumer confidence, worldwide financial uncertainty, and high unemployment, the same issues that have plagued our economy for the last 4 years. It was only two years ago that we endured the worst financial crisis since the depression and investors lost nearly all of their investments. An event such as that takes time to fully recover, both economically and psychologically. We are so afraid that history is going to repeat itself that we no longer are trading on fundamentals or the growth of a company. We now trade on economic indicators, political messages, and assumptions among other things, and this has led to the decline of the automotive industry.

I believe that strong sales and innovation from both GM and F will prove to increase stock value in the near future. However, It's very possible that both Ford and GM will lose additional value over the next few months as more uncertainty within the financial markets could present itself. But with P/E ratios below 6.5 I wonder how much lower these two stocks, which are showing progress, are capable of going. At some point in the near future I expect the growth of these two companies to overwhelm the uncertainty that surrounds the industry. The benefits outweigh the risks: more units are being sold, new vehicles are being developed, balance sheets are improving, and the stock is trending lower. I believe this collection of facts could result in both GM and F reaching new 52 week highs within one year, as the market attempts to recover. The issues within the market are financially related and although the financial industry impacts all areas of the economy, these two companies are still outperforming with strong sales.

I am bullish on both F and GM and although I have attempted to find some logical reason that would cause either of these two companies to trend so low, I have been unsuccessful. I anticipate both companies continuing to increase sales as new fuel-efficient vehicles are created, which will show consistent growth that could ultimately result in large gains for long-term shareholders.

Disclosure: I am long GM.