Ford, GM Poised For Gains In 2012

Mar.15.12 | About: Ford Motor (F)

Global growth is expected to be weak this year but the US economy has been picking up. Unemployment continues to trend down at the same time job creation is on the rise. Expectations for weak European markets has been factored into growth outlook and corporate guidance for at least a full quarter. The unfolding sovereign debt crisis and Greek debt swap has been on the radar far too long. In other parts of the world, despite slowing growth concerns in Asia, US automakers have been able to remain strong, especially in India and China. General Motors (NYSE:GM) recently announced that it set another February sales record in China. Sales rose over 30% for GM from February 2011 and were the third highest sales in one month recorded by the company. Ford (NYSE:F) has reported strength in the region as well. Sales in its India based unit are in line with consistent growth seen in the region last year and expected for this year.

Car and light truck sales in the US have been increasing steadily and are at two year highs. Car sales lead the trend with double digit increases in all categories except large cars. Total car sales in 2012 have increased by 22% over 2011 on a year-to-date basis. The only category to decline so far is large cars, which saw an 84% drop in sales. Sales of light duty trucks are also increasing, but not at the strong pace seen by cars. Total light duty truck sales increased by 5.8%, led, surprisingly, by SUV's. US automakers hold 10 of the top 20 vehicles by sales. The Ford Focus, number 7 on the list, made a near 90% increase in sales from the same period in the previous year.

US automakers have been regaining US and world market share from foreign based competition. Over the past year GM has been able to maintain an industry leading rate between 18-22%. At the same time Ford has managed to retain the number 2 position. Ford pushed Japanese automaker Toyota (NYSE:TM) out of the spot in 2010 and has held around 17-18% of the market for the last year.

On a year to date basis sales among car makers was mixed. GM has failed to increase sales due to expected weakness in Europe. Discounting the import car and truck impact the industry leader managed to squeak out a small gain in sales. Ford increased sales by over 11%, and Chrysler made a surprising come back with a 42% gain over last year. Toyota and Nissan (OTCPK:NSANY) also increased sales by 10% and 13% respectively.

Ford reported full year 2011 results in January. The company reported its third straight year of sales and revenue increases. Full year pre-tax operating profit of $8.8 billion was an increase of over $460 million from 2010. Full year net income for 2011 was $20.2 billion, or $4.94 per share. This is an increase of just over 50% from the previous years $3.38 per share. Ford is expecting to continue sales growth in the mid single digits for 2012.

The stock, which is currently trading around $12.50, is undervalued on an earnings basis. The stock currently trades with a p/e of only 6.5. The average Dow component is trading over 15 times earnings. The stock is well supported and has 50% institutional ownership. Ford is building a strong support level at $12, the range is in line with the 30 and 200 exponential moving averages which are both flattish with upward bias. Bearish momentum in the stock is waning and about to crossover into bullishness at the same time the stock is in oversold territory. While not at an extreme the indicator do support further upward price action in the stock. Long term, Ford is trading at resistance set in 2010 with strongly bullish momentum. The stock looks ready to break out and could move as high as $15.

General Motors is also undervalued on an earnings basis. The stock is currently trading around $26, about 6 times 2011 earnings. This stock has had a strong move up from market bottoms in August 2010 and is trading above the 30 and 200 moving averages, which are in line with each other. The stock does not have as much institutional ownership as Ford but it is there, around 35%. A major headwind for GM is government ownership of the stock which resulted from the bail out of the company. The US treasuries cost basis in GM is around $43 per share.

On the short term charts GM is building support around $25. Technical indicators, moving averages and candle patterns all confirm strength at this price. A move from here could take GM to trade in a range between $30 and $32.50.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.