Ford Motor Company (F) and General Motors Company (GM) both appear to be selling at a discount as measured by price-to-earnings. Ford's current P/E is 2.1, which is distorted due to a tax gain. GM's P/E is 5.71.
To better compare the two by valuation, we will use "automotive operating free-cash-flow," defined as automotive operating cash-flow less capital expenditures. We define it this way because: (1) both companies release automotive operating cash flow, and (2) we won't have to mess with adjustments for pensions or tax benefits since those adjustments are already accounted for in company figures. Coincidentally, they also result in smaller free-cash-flow figures and so the figures embrace a healthy conservatism.
For the period ended December 31, 2011
A) Automotive Operating Cash Flow
B) 3-Year Average Capital Expenditure
Operating Free-cash-flow (A - B)
Market Capitalization (6/27/2012)
Price to Operating Free-cash-flow
Worldwide Market Share
Revenue / Employee
*This includes debt from their massive financing arm. When Ford's management discusses debt, they generally mean debt of the automotive side. Debt relating to the automotive side of the business was $13.1 billion at December 31, 2012. (See Ford 2011 10-K, Note 18)
GM is still "Government Motors"
The United States Treasury ("UST") owns 31.9% of the outstanding shares of common stock of GM. Indeed, GM is still run by the UST, the Canadian Government, and the United Auto Workers union. These three groups, together with the shares under their pension plan, make up 55% of the common shares outstanding. There is no mistake about who holds power over the company. In addition to GM's low debt levels, it also has a government guarantee of sorts since its main shareholder is the U.S. Government. That should further reduce risk of default and thereby lower the discount rate used to value the company.
The debt line item above serves to illustrate one of the largest differences between these two corporations. In fact, given that most other indicators favor Ford, the debt level and the government guarantee can make GM look better in comparison. Further, GM's market share also looks better than Ford's.
GM Global Market Share (from 10-K, p. 34):
Market Share (position) - points of note
Western and Central Europe
Asia Pacific, East Europe, Africa and Middle East
9.5% (#2)-Sales in China represent 77.1%*
18.8% (#1)-Sales in Brazil represent 59.4%
*With a population 4 times that of Canada and the United States combined, GM is focusing on China which already makes up about 21% of their total revenue. In China, through their JV partners, GM has a market share of approximately 13.6%.
Ford Global Market Share (from 10-K, p. 5 - 10):
Ford North America
Ford Asia South Pacific
Ford South America
Regions are called "Ford" because the countries included are irregular, much like GM's classification.
While reporting that it may fall short of market share expectations this year, Ford has been steadily increasing its market share in North America, China, India, and Russia. Ford's brand is strong enough to continue to capture more of the Chinese market than the 2.7% it had last year; after all, it has grown unit sales by 26.4% year-over-year since 2007. For comparison, GM already has a strong position in China, and since 2009, its unit sales have increased 16.6% year-over-year.
Ford CEO Alan R. Mulally stated in the 2011 Annual Report (pdf):
"Industry-wide vehicle sales are expected to rise significantly in the next few years, driven by accelerated expansion in developing markets, recovery in mature markets, and sales of smaller and more fuel-efficient vehicles. We expect our sales to increase to about 8 million units by mid-decade, up about 50 percent from 5.3 million units in 2010. Because of significant growth in the region, by 2020 nearly one-third of our sales will come from Asia Pacific Africa, more than doubling the current percentage of global sales volume we achieve in this region."
Alan Mulally stated at the shareholder meeting that Ford is done turning around and is ready to move forward. In the 2011 Annual Report, he points to the cost cutting measures which have taken place. From 2002 to 2009, Ford's cost of sales averaged 95% of sales. In 2010 and 2011, Ford's cost of sales dropped to 87% and 88%, respectively. Taken in total, the One Ford strategy implemented under Alan Mulally has been a success.
Ford has also reinstated its dividend, which indicates a belief in the company's ability to pay it. At around $760 million, the dividend is covered 6.7 times by free-cash-flow as calculated above. The interest charge from the automotive side is equal to about 16% of free-cash-flow or is covered 6.25 times.
While all the auto manufacturers are touting their fuel efficiency, Ford states one-third of its product lines will feature a 40 mpg model. By 2013, 80 to 90 percent of its product lines will be offering the option of its EcoBoost Engine. With the increasing strength of environmental regulations over the next decade, this allows it to develop the institutional structures to deal with new consumer tastes and an increasingly stricter regulatory environment.
Neither company is selling above a fair price. The low debt, the de facto government guarantee and market share of GM may help explain the difference in the valuation of the two companies. But Ford is executing on its plans successfully and, in my opinion, Alan Mulally is a excellent CEO. If Ford was valued with a similar P/FCF multiple as GM, it could sell as high as $19.50. While both their P/E ratios suggest undervaluation, only Ford is undervalued.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.