In one of my first articles on Seeking Alpha here, I highlighted how Ford (F) would drive high-risk adjusted returns. Since then, the stock has appreciated by 20.1%, beating the S&P 500 by 812 basis points. According to T1 Banker, the company is still rated a "buy" on the Street versus a "strong buy" for General Motors (GM). Based on my review of the fundamentals and multiples analysis, I anticipate that Ford will outperform its competitor.
From a multiples perspective, GM is rightfully the cheaper of the two, due to 'greater uncertainty' as we shall see below. It trades at a respective 6.2x and 5.8x past and forward earnings, while Ford trades at a respective 7.7x and 7.5x past and forward earnings. To put this into greater context, consider that Ford is valued at 59% of its 3 Digit MG group PE multiple.
At the fourth quarter earnings call, GM's management noted impressive results:
"Overall we posted a solid performance for the year and showed steady progress towards a sustained long term strong financial performance. Obviously, we still have a lot of work to do in some areas and we're taking the necessary corrective actions to get the ball over the goal line. More on that in a moment.
For the year global deliveries topped 9 million vehicles, up nearly 8% over 2010. In fact, we increased sales volume in each of our four regions. Not only our total sales volumes up but also was our overall market share. Global markets share came in at roughly 12%, 11.9% to be precise, up 0.4 percentage points".
Domestic performance was particularly noteworthy. The company gained 40 bps in market share, bringing its stake to 19.2%. EPS came out meaningfully ahead of expectations at $0.39, largely driven by strong pricing and expensive management in the United States. Pensions also grew 11.1%, delivering a return that is valued at nearly one-quarter of GM's market cap!
Free cash flow is modeled to grow around $1.0B to ~$5.5B in 2013, as net cash grows by around $7.4B. Consequentially, the company may start to explore the implementing of an aggressive capital allocation as a way to attract investors from Ford. On the other hand, Europe, China, and South America are highly uncertain. ROE is expected to fall by around 530% over the next three years.
Consensus estimates for GM's EPS forecast that it will decline by 3.4% to $3.75 in 2012, and then turnaround to grow by 23.2% and 12.8% in the following two years. Assuming a multiple of 7x and a conservative 2013 EPS of $4.55, the rough intrinsic value of the stock is $31.85, implying 16.5% upside.
Ford is similarly improving liquidity and is actually moving towards a net cash position of around $1.8B by 2013-end. The firm's business mix and band is solid. With a beta of 2.4 and pricing aggression, Ford is well positioned to outperform in a recovery, as concerns over risk dissipate.
Consensus estimates for Ford's EPS forecast that it will decline by 2.6% to $1.47 in 2012, and then turnaround to grow by 15.6% and 15.3% in the following two years. Assuming a multiple of 10x and a conservative 2013 EPS of $1.65, the rough intrinsic value of the stock is $16.50, implying nearly 30% upside.