In my notorious article here, I argued that General Motors (GM) would precipitously decline in value. It has since fallen 5.3%, underperforming the S&P 500 by 1,000 basis points. In this article, I will run you through the fundamentals of GM and compare them to Ford (F). I find, again, that Ford will meaningfully outperform. GM certainly won't crash despite fears, but it isn't the unsuspecting risk/reward that some bulls make it out to be.
First, let's begin with an assumption about revenues. GM finished FY2011 with $150.3B in revenue, which represented a 10.8% gain off of the preceding year - deceleration. Analysts model a 13.1% per annum growth rate over the next half decade, and I think this is slightly on the optimistic side given that it is around 200 bps higher than what is expected for the S&P 500.
Moving onto the cost-side of the equation, GM is overwhelmed by expenses. Operating expenses represent around 87% of revenue. Capex is estimated at around 4.5% of revenue. I assume that net increases in working capital will hover around -3% of revenue, thus adding back value into the firm.
All of this falls within the context, however, of a successful turnaround:
"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.
We gained share in our most critical markets. Our U.S. share was 19.2%, up 0.4 percentage points. China share was up 0.7 percentage points to 13.6%. In fact we grew it more than three times the market and we were the first company to sell more than 2 million vehicles in China in two successive years and each year we do it earlier in the year which is good news."
From a multiples perspective, both GM and Ford appear cheap. GM trades at 5.5x past and forward earnings versus a respective 2.5x and 7.4x for Ford. Assuming a multiple of 5.5x and a conservative 2013 EPS of $4.50, the rough intrinsic value of GM's stock is $24.75, implying that it has some downside.
Ford, which was able to survive the auto collapse without government aid, has stronger fundamentals. It is rated a "buy" on the Street, according to T1 Banker, and has strong upward momentum. Assuming a multiple of 9x and a conservative 2013 EPS of $1.68, the rough intrinsic value of the stock is $15.12, implying 21.3% upside. Ford merits this premium to GM due to the fact that it has been able to gain market share while the industry collapsed. I believe that investors will be particularly appreciative of this success when the economy hits full employment. Ford ultimately is not a transfer payment zombie stock and can stand on its own two feet.
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